Fitch sees little credibility in Lula's economy and the country is far from investment grade.

The credit rating agency Fitch Ratings stated that the Brazilian government's economic policy, especially its fiscal framework, has "little credibility." Fitch ruled out the possibility that the country will regain its investment grade status by the end of Lula's federal government. The assessments took place this Tuesday (9), at an event held by the agency in São Paulo.

"We don't expect Brazil to regain investment grade status any time soon. Fiscal credibility is once again being questioned year after year by market participants," said Shelly Shetty , Fitch's head of sovereign ratings for the Americas and Asia.

Brazil lost its investment grade, a "good payer" status that facilitates international financing with lower interest rates, amid the fiscal crisis of the Dilma Rousseff government in 2015. Although countries take about six years to regain their rating, Brazil, according to Fitch, is still "far from it."

Divergence in growth projections

Shetty also expressed caution regarding Brazil's growth projections for 2026. While the government forecasts growth of 2.4%, Fitch expects a more modest 1.9% expansion.

According to the executive, part of the official optimism depends on the approval of new tax increases in Congress to achieve fiscal targets — a point that the agency monitors closely, as it considers the dependence on extraordinary revenues risky.

"Public spending is very high in Brazil, and it will continue to grow in the coming years, in our baseline scenario. And this reduces the credit profile," said the analyst.

Structural risks to public debt

Fitch also points to medium-term factors that cast doubt on the sustainability of Brazil's public debt:

• High tax burden: already at a high level, which limits the possibility of new sources of revenue without a negative impact on the economy.
• Budgetary rigidity: with a large portion of mandatory spending, there is little room for discretionary expenses, such as investments.

According to Shetty, this combination makes the country's ability to control debt growth in the coming years more uncertain.

History

In July 2023, Fitch upgraded Brazil's debt rating, bringing it to within two notches of investment grade. The agency assesses the outlook as stable, indicating that it does not plan to change the rating in the coming months.

S&P also revised Brazil's debt rating in December 2023, raising it from three notches below investment grade to two. The country's rating remained unchanged earlier this month, maintaining the position Brazil achieved after being three notches below investment grade in 2018.

In late May, Moody's adjusted the outlook on Brazil's sovereign debt rating from positive to stable. Since Brazil's rating is already at investment grade, this decision ended the country's chances of achieving the good payer status until the end of the current administration.