By Jamie McGeever
BRASILIA, July 28 (Reuters) - Credit rating agency Moody's on Tuesday warned Brazil's government that changes to its fiscal rule limiting the growth in non-obligatory public spending to inflation puts its long-term goal of reducing the national debt in jeopardy.
The statement from Moody's came after a local media report on Tuesday said the Economy Ministry was open to relaxing the "spending cap" rule, which it has always insisted is the pillar upon which its fiscal policy is built and not up for debate.
"Introducing changes to the spending ceiling would raise concerns about the trajectory of Brazil's debt burden and the prospects of stabilizing and reducing debt gradually," said Samar Maziad, Moody's lead Brazil analyst.
"Significantly lower inflation increases the challenge of compliance with the spending ceiling next year. From a sovereign perspective, lifting the spending ceiling without compensating measures to ensure fiscal sustainability would be a negative development."
Moody's has a "stable" outlook on its "Ba2" sub-investment grade sovereign credit rating on Brazil. Maziad warned in May that a permanent deterioration in the fiscal situation from emergency, crisis-fighting spending "would be the critical trigger for a rethink on the outlook."
According to the Economy Ministry's latest forecasts, the primary budget deficit excluding interest payments will reach a record 787 billion reais ($153 billion) this year, 11% of GDP. The broader public sector deficit will be closer to 800 billion reais and 12% of GDP.
The 2020 target before COVID-19 was for a shortfall of 124 billion reais. Emergency fiscal policy to tackle the crisis will be limited to this year and the spending cap rule will not be altered, officials have consistently said.
The government's wiggle room for spending in coming years is virtually non-existent due to the record high deficit and debt, combined with historically low inflation of around 2%. Public investment, for example, is the lowest on record. (Reporting by Jamie McGeever; Editing by Leslie Adler)