Standard & Poor's Ratings services today said that the solid fundamentals in fiscal and external accounts that Brazil achieved over the last several years are expected to continue despite adverse and ongoing political developments and allegations of corruption.
The article, entitled "The Forest For The Trees: Looking At Political Developments In Brazil Within The Context Of Its Institutional Framework And Solid Fundamentals," reveals that Brazil's ratings and outlook assume ongoing
prudent policy actions by President Luiz Inácio Lula da Silva's government, and presume that Brazil's institutional processes maintain integrity in the midst of current political turmoil.
"The current political context renders passage of controversial pieces of legislation or reform more difficult, although given Brazil's electoral cycle the expectation of limited progress is already incorporated in the ratings," said Standard & Poor's credit analyst Lisa Schineller. "The ratings, however, do assume continued commitment to prudent macroeconomic policy by the current and future governments and appropriate and adequate policy response to
internal or external shocks. Should policy commitment falter, the rating and/or outlook could be affected," she added.
According to Ms. Schineller, strengthened fiscal and external fundamentals during the past several years better enable Brazil to withstand adverse shocks. That said, favorable global liquidity conditions have likely contributed to dampening financial market reaction to the crisis to date.
"Policy signals suggest that the Lula government recognizes the importance of maintaining macroeconomic stability," Ms. Schineller said. "In addition, Brazil's institutional framework limits the degree to which policy can regress," she explained.
The current debate among the government, politicians, and the private sector about the efficacy of targeting a "zero nominal deficit" demonstrates growing political maturity and the broad support for strong fiscal management. Although meaningful progress on legislating a credible zero nominal deficit policy seems low at this point in time given the political complexities involved, it is noteworthy that such a discussion is occurring.
"Comparatively strong institutions vis-à-vis other peer credits also support Brazil's rating despite the seriousness of the political crisis and allegations of corruption," noted Ms. Schineller. "The allegations are being investigated within the context of an open and strong democracy utilizing Brazil's system of checks and balances: Congress, the judiciary, the press, and society at large. This highlights the vibrancy of Brazil's institutional framework," she concluded.