Brazil Outlook Cut to Negative by Fitch on Fiscal Challenges

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Brazil had the outlook on its credit rating cut to negative by Fitch Ratings, which cited challenges in implementing fiscal adjustment amid a stalled economy.

Fitch lowered the outlook on Brazil’s sovereign rating to negative from stable, according to a statement Thursday. The ratings company kept the country at BBB, the second-lowest investment grade.

Brazil’s fiscal accounts have “markedly” deteriorated amid low growth rates and elevated inflation, Fitch said. President Dilma Rousseff’s efforts to reduce the deficit and restore investor confidence could be undermined by the president’s record low popularity and an ongoing corruption probe at state-run Petroleo Brasileiro SA, according to Fitch.

“While the government has begun a macroeconomic adjustment process to boost policy credibility and confidence, downside risks related to its effective implementation and durability persist,” Fitch analysts led by Shelly Shetty wrote. “Medium-term growth prospects would largely depend on the government’s ability to reverse the downshift in confidence and improve the competitiveness of the economy.”

In March, Brazil had its investment grade status affirmed with a stable outlook by Standard & Poor’s, which last year gave the country its first sovereign downgrade in more than a decade. S&P rates the nation at BBB-, the lowest investment grade. Moody’s Investors Service, which rates Brazil one level higher, put the nation on negative outlook in September.

’Long Due’

With the economy expected to post the worst contraction in 25 years and inflation breaching the top of the central bank’s target range, Rousseff’s approval rating fell to a record low of 13 percent, according to a Datafolha poll of 2,842 people conducted March 16-17.

Rousseff, who began her second term in January, said in a March 31 interview that she will do whatever it takes to meet the primary budget surplus target, which excludes interest payments, of 1.2 percent of gross domestic product this year. In 2014 there was a deficit.

After suffering several defeats from her own ruling coalition, Rousseff on Tuesday designated Vice President Michel Temer as her main liaison with Congress. Temer, who also heads her largest coalition partner, replaced a member of Rousseff’s Workers’ Party. The next day, leaders of the ruling coalition pledged to support policies aiming at reducing the budget deficit.

“The change in the outlook was long due,” Bruno Rovai, an economist at Barclays Plc in New York, said in an e-mailed response to questions. “All of these moves reduce meaningfully the tensions on the political front. Albeit necessary, they are not sufficient to guarantee that all of the fiscal measures will be approved as they are sent to the Congress.”

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