Fitch Ratings has affirmed Brazil's long-term foreign currency rating at 'BB' with a stable outlook, citing the country's resilient economy but warning that mounting fiscal pressures and political uncertainties continue to weigh on the nation's creditworthiness.

In a statement on June 25, the credit rating agency pointed to Brazil's large and diverse economy, strong external finances and deep local markets as key strengths supporting the rating. However, Fitch warned that high and rising government debt, budgetary rigidities and relatively low potential growth remain significant constraints.

"Fiscal uncertainties remain a source of broader macroeconomic risk, having manifested in recent market volatility," Fitch said in its rating commentary. The agency noted that prospects for structural reforms to address underlying fiscal imbalances are unlikely to become clearer until after Brazil's 2026 general elections.

Brazil's federal primary deficit improved to 0.4% of GDP in 2024 from 2.4% in 2023, but Fitch cautioned this largely reflected timing issues and one-off revenues rather than structural improvements. The administration of President Lula da Silva faces growing congressional resistance to tax increases whilst spending pressures remain elevated.

The rating agency expects Brazil's general government deficit to widen to 8.0% of GDP this year from 6.6% in 2023, driven by surging interest costs following monetary tightening by the central bank.

Fitch projects Brazil's debt-to-GDP ratio will climb to 79.3% in 2025 from 76.5% in 2024, remaining on "a steep upward path of around 3 percentage points per year" and diverging significantly from the 'BB' median of 53%.

The agency noted that achieving fiscal targets in 2026 will prove challenging as elections typically reduce appetite for spending cuts whilst increasing pressure for higher expenditure. There is growing recognition across Brazil's political spectrum that durable fiscal consolidation will eventually require reforms to curtail growth in entitlement spending.

On the economic front, Fitch expects Brazil's GDP to grow 2.5% in 2025, down from 3.4% in 2024 due to tight monetary conditions. The central bank has raised its policy rate by 450 basis points to 15.0% as of June to combat inflation, which reached 5.3% in May.

Brazil's current account deficit widened to 2.8% of GDP in 2024 from 1.3% in 2023, though robust foreign direct investment continues to fully fund the moderate deficit. The Brazilian real has experienced significant volatility despite the favourable external position, as fiscal uncertainties triggered capital outflows.

Fitch's sovereign rating model assigns Brazil a score equivalent to 'BBB-', but the agency applied negative adjustments reflecting weak potential growth and fiscal rigidities to arrive at the final 'BB' rating.

The rating agency said Brazil's creditworthiness could face downward pressure from policies that undermine fiscal credibility or macroeconomic stability. Conversely, progress on fiscal consolidation that durably stabilises government debt could support a ratings upgrade.