NEW YORK--(BUSINESS WIRE)--The outcome of Brazil's presidential election is broadly credit neutral for its sovereign ratings as Fitch believes that the Rousseff administration is unlikely to depart from the key elements of Brazil's current macro policy framework, according to a Fitch special report. These elements include inflation targeting, a flexible exchange rate regime and broad fiscal responsibility.
President-elect Rousseff will inherit a relatively strong economy following her victory in the second round of voting. A rapid economic recovery, moderate inflation and a robust external balance sheet underpin Brazil's good economic prospects.
The paramount question in Fitch's view is whether her administration will take measures to make the economy even stronger while addressing some of its fiscal weaknesses. Fitch notes that fiscal consolidation this year has not kept up with the strength of the economy owing to the fast-paced growth in public spending. Moreover, gross general government debt at 62.8% of GDP in 2009 remains heavy compared with the 'BBB' median.
'Signs of fiscal restraint from the new administration coupled with a pragmatic approach toward defining the role of the state would be welcome developments,' said Shelly Shetty, Head of Latin America Sovereigns. Moreover, fiscal credibility could be boosted if the new government reverses the recent creeping opaqueness in some of the fiscal operations that are somewhat undermining the relevance of the primary surplus target as a determinant of the government's policy stance.
Ms Rousseff's relatively strong mandate, which is boosted by the gains the coalition led by her Partido dos Trabalhadores (PT) has made in both houses of congress, provides the new administration with the space to embark on more substantial economic reforms. However, her administration's success in strengthening Brazil's credit profile will depend on its political willingness and capacity to move on reforms that reduce fiscal vulnerabilities, further entrench macroeconomic stability and facilitate higher and sustainable growth.
In this regard, 'Ms. Rousseff's choice regarding her chief of staff as well as key members of the economic team (the central bank governor and the finance and planning ministries) will serve as signals on how she positions her administration early in the term to progress on economic reforms, as well as on the relative emphasis she places on entrenching the existing macroeconomic policy framework,' added Shetty.
In June 2010, Fitch affirmed Brazil's Long-Term Issuer Default Rating of 'BBB-' and revised the Rating Outlook on Brazil to Positive from Stable to reflect the country's better-than-expected economic resilience during the global credit crisis, its fast-paced economic recovery, the maintenance of credible policies through the crisis and the country's strengthened international liquidity position. The Positive Outlook also reflects Fitch's view that continuation of favorable economic prospects could imply future increases in per capita income and further improvements in fiscal and external solvency ratios, which in turn would benefit sovereign creditworthiness.
The full report 'Brazil After the Elections' is available on the Fitch Ratings web site 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Brazil After the Elections: Rousseff Victory Broadly Credit Neutral