Thursday, October 22, 2015

LatAm Minute: Fitch's Shelly Shetty on Brazil's Upcoming Lean Years

By Luisa Leme

The head of Latin American Sovereigns at Fitch is hoping fiscal reforms will move the economy forward.

Brazil’s second downgrade by a credit ratings agency in two months sparked concern about the country’s economic health. After Standard & Poor’s downgraded Brazil’s credit rating to junk status in September, Fitch Ratings <a href="https://www.fitchratings.com/site/fitch-home/pressrelease?id=992331" target="_blank">reduced</a> Brazil’s grade to BBB-, a notch above junk for that agency, on October 15.  The agency’s outlook is still negative. What’s more, while most investors can tolerate one junk rating, if two of the three ratings agencies give a country a junk rating, then some investors <a href="http://www.reuters.com/article/2015/10/16/brazil-ratings-fitch-idUSL1N12F16M20151016" target="_blank">may be barred</a> from holding that country’s bonds. This is why another downgrade from Fitch—Brazil’s second—would be a blow. Shelly Shetty, head of Latin American Sovereigns at Fitch, explains that Brazil’s economic performance and spillovers from corruption scandals linked to Petrobras and the construction sector have hurt investors’ confidence during 2015. The agency forecasts an economic contraction of 3 percent in 2015 and 1 percent next year, with growth starting again in 2017. Moving forward, Fitch will focus on what it sees as the main obstacle to more optimistic numbers: the country’s political war over austerity measures, namely the fiscal reform. Shetty says Fitch believes the political environment continues to be volatile, “creating risk for the macroeconomic policy outlook.” Brazil’s political turmoil, impeachment calls, and President Dilma Rousseff’s difficulties with her allies in Congress are reform roadblocks. “Given this political environment, it is clearly questionable whether these measures would actually be passed,” says Shetty. But not all is lost for the Brazilian economy, she says. Shetty believes the country has made progress with administered prices increases. She explains that while some of these price adjustments might be leading to short-term pain for the consumers and a weakened currency, the measures are the way to recovery. Says Shetty, “We think these are clearly the necessary medicines to get a cure.”

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LatAm Minute: Fitch's Shelly Shetty on Brazil's Upcoming Lean Years

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