Moody’s sees no major turmoil in Brazil after election, cites fiscal risk

Ratings agency Moody’s Investors Service said on Thursday that its baseline scenario for Brazil does not incorporate major disruptions after the presidential election, but warned that any lingering uncertainty about the direction of the country’s economic and fiscal policy will hamper the country’s prospects.

In a report on sectoral expectations, Moody’s said that the vision of a post-election environment without major turmoil would be sustained both under a re-election of current President Jair Bolsonaro (PL) and under a victory of former President Luiz Inácio Lula da Silva (PT) .

The two candidates will face off in a tense second round later this month.

However, “Brazil’s next presidential administration will face several challenges: maintaining fiscal discipline, investor confidence and growth,” the rating agency said, adding that maintaining the credibility of domestic fiscal policy “will be critical to manage those risks”.

Moody’s said the spending cap — the main anchor for Brazil’s public accounts — would likely remain in place under the next administration, although it acknowledged that there could be changes to the rule, which “would impose fiscal risks.”

“While we expect the next administration to look to amend the spending ceiling, the credit implications of potential changes will depend on the magnitude of additional spending. Such credit implications would also depend on Brazil maintaining a credible fiscal framework that provides a clear path to fiscal consolidation and a clear trajectory for public debt,” Moody’s said in the report.

In addition to the fiscal issue, the agency noted that the momentum of structural reforms has slowed in Brazil, and said that the risks of reversing reforms already implemented after the election should weigh on investor confidence.

“In the medium term, restoring growth potential and improving sustainable growth would depend on the next administration pushing forward structural reforms that encourage stronger private sector investment,” Moody’s said. “Post-election uncertainty about government (economic) policy or increased state intervention in key sectors would dampen prospects for strong private investment, weighing on future growth.”

The high interest rate environment complicates the Brazilian situation, said the agency, since the increase in the Selic rate to the current 13.75% makes it difficult to pay public debt.

High borrowing costs are also expected to undermine Brazil’s economic activity, which Moody’s says will slow in 2023, “with negative implications for government revenue and debt dynamics.”

“Such conditions will continue until the next government sets a clear direction for its fiscal policy in the coming years,” the agency added.

The fiscal spending ceiling has already been relaxed during the Bolsonaro administration in order to accommodate spending boosted with social benefits, and economists say the current president would need to make further changes to the rule if reelected to be able to fulfill campaign promises.

Lula, in turn, has resisted detailing his plans for the fiscal area, but has stated several times that he intends to abandon the spending ceiling if he wins the elections.

Source: CNN Brasil

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