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DBRS downgrades Brazil amid delays in pension reform, revises trend to stable

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DBRS downgrades Brazil amid delays in pension reform, revises trend to stable

DBRS lowered Brazil's long-term foreign and local currency issuer ratings to BB (low) from BB, saying the delayed passage of a pension reform bill has led to the weakening of the country's public debt sustainability outlook.

The rating agency said without the pension reform, the government will have to deal with its fiscal problems through measures that could weaken medium-term growth prospects. The country's large budget deficit and rising public debt burden are key constraints to its ratings.

Brazil's pension spending, which covers a large share of total government expenditures, is rapidly increasing due to Brazil's aging population and the government's generous benefits, DBRS noted.

"Without reform, rising mandatory spending will become incompatible with the constitutional spending cap … The savings lost by not reforming the system will need to be offset by commensurate expenditure cuts elsewhere, a prospect that could be both economically inefficient and politically challenging," the rating agency said.

DBRS said Brazil's public debt dynamics are unlikely to stabilize in the near term and its primary balance is expected to rise to 1.9% of GDP in 2025 after shifting to a surplus in 2021.

The country's economic recovery is expected to quicken this year, with GDP growth projected to hit 1.9% after expanding 1.0% in 2017, DBRS said. However, it warned that medium-term growth prospects are relatively weak amid high business costs and low investment, particularly in infrastructure, which is limiting productivity.

As part of the ratings action, DBRS also revised the trend on Brazil's ratings to stable from negative due to the country's improved monetary policy credibility, reformed credit markets and stronger household balance sheets.