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Fitch sees 'inflection point' in Brazilian corporate credit

Credit trends for corporates in Brazil have reached an inflection point caused by abundant domestic market liquidity, historical low interest rates and slowly improving corporate cash flow, Fitch Ratings said.

"Uncertainty remains regarding Brazil's economic recovery given fiscal tightening, challenges to the country's reform agenda, the effects of the U.S.-China trade war, and the impact of Argentina's financial crisis on exports to that market," Fitch noted. Still, the rating agency expects rating stability over the near term, provided that the downgrades-and-upgrades ratio improves.

For 2020, Fitch expects higher GDP growth and lower interest rates to support cash flow, as the investment cycle turns and capital spending speeds up, especially in capital-intensive sectors.

The rating agency also pointed to abundant liquidity, which enables "better liability management and lowers refinancing risk across the broader Brazilian corporates portfolio."

Fitch cut the country's 2019 and 2020 GDP growth forecasts to 0.8% from 1.0% and 2.0% from 2.2%, respectively, in September owing to persistent "economic softness amid rising external headwinds and an uneven recovery in domestic confidence." The rating agency's policy rates projections for Brazil are 5% at the end of 2019 and 5.25% at the end of 2020.

The rating agency noted that it has a stable rating outlook or rating watch for 85% of the Brazilian corporates it covers, up from 50% in 2017. Meanwhile, the percentage of corporates with a negative outlook has dropped to 6%, from 45% in 2017.