By Jamie McGeever
BRASILIA (Reuters) – The Brazilian government’s decision to exclude extra pandemic-fighting expenditure this year from the spending cap framework is a negative development for the country’s sovereign credit profile, ratings agency Moody’s said on Thursday.
The agreement with Congress that COVID-19 spending will not be subject to the cap, seen as the government’s most important fiscal rule and crucial to retaining investor confidence in Brazil, paves the way for the 2021 federal budget to be signed into law later Thursday by President Jair Bolsonaro.
“The decision to exclude additional covid-related expenditure from the spending ceiling this year is negative for Brazil’s credit profile,” said Samar Maziad, Moody’s vice president and lead sovereign analyst for Brazil.
Maziad said she expects policymakers and lawmakers to maintain their commitment to fiscal consolidation over the longer term, but risks are building.
“If recurrent exceptions are made for higher spending above the ceiling, questions will be raised about the credibility of the spending ceiling as a fiscal anchor, with negative implications for Brazil’s borrowing costs and debt dynamics,” she said.
Moody’s has a sub-investment grade Ba2 rating on Brazil’s sovereign credit, with a stable outlook. Brazil’s government debt is almost 90% of gross domestic product, well above the average for its emerging market peers.
The ceiling limits growth in public spending to the previous year’s annual rate of inflation, in theory preventing the public finances from deteriorating too much too quickly.
But crisis-fighting spending last year blew a record hole in government finances, and a deadly second wave of the virus this year has triggered another round of budget-busting largesse.
Bolsonaro is expected to sign the 1.5 trillion reais ($275 billion) federal 2021 budget into law later on Thursday.
($1 = 5.46 reais)
(Reporting by Jamie McGeever; Editing by Kirsten Donovan)
