UPDATE 1-Fitch affirms Brazil rating, warns of fiscal test

Tue May 12, 2009 3:36pm EDT
(Adds quotes from analyst, background)
By Walter Brandimarte
NEW YORK, May 12 (Reuters) - Fitch Ratings affirmed Brazil's investment-grade credit ratings on Tuesday but warned that the country's fiscal credibility will be tested by the global economic crisis.
Fitch said Brazil's lower primary surplus target for 2009, coupled with an economic contraction and increased Treasury transfers to the national development bank, will increase a public debt burden that is already "significantly higher" than that of similarly-rated countries.
"A challenging economic environment will expose Brazil's structurally weak public finances and test the authorities' fiscal credibility as they grapple with a revenue shock in 2009," Fitch analyst Shelly Shetty said in the statement.
She added, however, that the country does not face financing constraints due to the depth of domestic markets and the proven government ability to access international capital markets this year despite tough market conditions.
Fitch currently rates Brazil at BBB-minus, the lowest investment-grade level, with a stable outlook. The rating is supported by a robust external balance sheet, the country's macroeconomic stability as well as political consensus on the thrust of macroeconomic policies, the agency said.
Constraining the ratings is the government's heavy debt burden, currently at 60 percent of gross domestic debt, as well as its weak public finances, modest growth rates and a "glacial" pace of reforms, it added.
Brazil's credit-worthiness could be pressured, Fitch said, by a marked deterioration of its debt composition, sustained fiscal slippage, or significant contingent liabilities potentially arising from the financial sector.
Latin American markets have become more sensitive to possible rating downgrades as the global economic crisis pressures the region's economy, after years of bonanza.
Standard & Poor's on Monday revised down the outlook of Mexico's BBB-plus credit rating, saying a downgrade is possible later this year. On Tuesday, it cut the ratings of El Salvador by one notch to BB.
Fitch Ratings has a negative outlook on Mexico's ratings since November. (Editing by Leslie Adler)