Fitch: lack of clear coalitions will challenge Brazil's reform

Fitch Ratings said that Brazil's first-round national elections on Sunday yielded a deeply divided Congress lacking clear coalitions, making the prospect for economic reform challenging.

The agency upgraded Brazil's sovereign ratings to BB from BB- in June based on the country's external finances, especially the sharp reduction in the public sector's external exposure, and the outlook remains stable, but now Fitch predicts that uncertain prospects in the next government for the passage of a pro-growth reform agenda, as well as likely pressures to loosen macroeconomic policies, could slow improvement in Brazil's sovereign creditworthiness.

President Lula failed to win a second term on Sunday in the first round of voting, and none of the major political parties won unambiguously in Congressional elections. By only obtaining 48.6% of the votes, Lula, of the ruling leftist PT party, will have to face his principal opponent, Geraldo Alckmin of the opposition PSDB party, who obtained 41.6% of the votes, in a run off on Oct. 29.

"Whether Alckmin or Lula wins in the second round, the next president will have great difficulty forging a reform coalition," Roger Scher, head of Latin American sovereign ratings at Fitch, said in an agency rating.

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