Brazil’s Debt-to-GDP ratio hints poor fiscal data on the back of S&P downgrade

Brazil loses its investment grade rating at S&P, Outlook still Negative, on the contrary, Brazil's fiscal situation must be resolved in the coming weeks. We observe, in August the consolidated public sector accounts posted a BRL 7.3 bn deficit. The central government imbalance reached BRL 6.9 bn deficit. Moreover, the state owned enterprises added BRL 0.2 bn to the deficit. So far this year, the primary deficit has reached BRL 15 bn, an unprecedented result in Brazilian fiscal data.

Over the past year, the primary deficit reached -0.8% of GDP. This is well below the already concerning 0.15% of GDP primary surplus target for 2015. Extremely high real interest rates and an ever increasing debt to GDP ratio add up to very concerning fiscal accounts' result. The nominal fiscal deficit is now over 9% of GDP against 6% last December.

On 9 September, S&P downgraded Brazil sovereign debt from BBB- to BB+, triggering a similar action on several corporates and banks which left only 50% of the Brazilian credit complex with a median investment grade rating. The S&P downgrade meant PETBRA, BNES, BRADES and ITAU were excluded from our major aggregate index at the end of September. The $55bn of excluded bonds are now sitting in Global HY index.