Although Brazil has made progress in stabilizing its debt burden through lower interest rates, a more pronounced decline in debt depends on faster economic growth and further fiscal adjustments, Moody's said in an Aug. 12 report.
A pickup in economic growth, completion of social security reform, and fiscal consolidation could lead to stabilizing debt metrics over the medium term, according to Moody's. The pace of debt accumulation, which now stands at 77% of GDP, has slowed down from previously seen steep levels of increase.
According to the rating agency's calculations, a one-percentage-point rise in real growth would reduce Brazil's required fiscal adjustment to stabilize the debt burden by 0.8% of GDP on average between 2020 and 2022. In contrast, a 100-basis-point decline in the Selic rate would only reduce the required fiscal adjustment by 0.1% of GDP annually during the same period.
Furthermore, Moody's believes that additional fiscal consolidation will be needed to achieve primary surpluses that will anchor declines in the government debt burdens. Although the pension reform bill will support fiscal sustainability, it is not enough to "fundamentally change Brazil's fiscal strength," Moody's said.
"[I]mproving fiscal flexibility beyond that coming from social security reform will be challenging but likely necessary to comply with the spending ceiling and gradually reduce the debt burden over the medium term," the rating agency added.
Brazil's credit profile will not observe material improvements without reforms that promote growth and if fiscal consolidation efforts are not accelerated, Moody's said. As a result, the country's credit profile could face downward pressure if the government fails to stabilize its debt burden.
Brazil's government debt began to pick up between 2014 and 2016, driven by a severe economic recession and a period of high interest rates. Debt dynamics improved in the following years as the economy started to recover, albeit at a modest pace, and interest rates descended, the rating agency said.
"Looking ahead, we expect debt accumulation to continue to slow, supported by moderate fiscal consolidation and a pick up in growth. Still, government debt ratios will continue to increase over the next three to five years as we anticipate the economy to recover at a relatively moderate pace," Moody's said.