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Moody's says Brazil breaking spending cap rule would hurt credit profile

BRASILIA, Sept 8 (Reuters) - The Brazilian government’s spending cap rule, its most important fiscal anchor, faces a “material risk” of being breached from next year onward due to rising political risk and pressure to maintain welfare spending, ratings agency Moody’s said on Tuesday.

Breaching the spending cap would push government debt - already at record levels from emergency spending and lost tax revenues caused by the coronavirus pandemic - even higher and threaten Brazil’s credit profile, Moody’s said.

“Political risks and pressures to expand social programs after 2020 still pose material risk to compliance with the spending ceiling in 2021 and beyond,” Moody’s analysts, led by Samar Maziad, wrote in a report.

“Breaching the spending ceiling could cause government debt to continue to rise, which would put pressure on Brazil’s credit profile,” they said, forecasting government debt to reach 95% of gross domestic product this year, up from 76% last year.

The spending cap rule limits growth in public spending to the previous year’s rate of inflation. The government published its 2021 budget proposal last week, but major doubts hang over welfare programs for millions of Brazil’s poorest people, which have provided a lifeline during the pandemic but were not included.

Moody’s has Brazil’s sovereign credit rating at a non-investment, or “junk” grade of Ba2 and a “stable” outlook.

Moody’s expects government spending to drop to about 39% of GDP in 2021 from 42% this year, which will support the fiscal accounts, although this would still be higher than the 38% of GDP pre-pandemic last year.

Although Brazil’s debt burden is “significantly” higher than its peers and other Ba-rated countries, debt affordability and servicing costs are much more favorable now thanks to record low interest rates, Moody’s said.

Interest payments as a share of government revenue fell to 18% last year from nearly 30% in 2015, and will stabilize around 16% over the next few years, Moody’s said.

Moody’s expects Brazil’s economy to shrink by 6.2% this year. (Reporting by Jamie McGeever; Editing by Steve Orlofsky and Will Dunham)