Brazil’s Credit Rating Cut to BBB- by S&P on Sluggish Growth

Brazil’s credit rating was cut by Standard & Poor’s, which said sluggish economic growth and an expansionary fiscal policy are fueling an increase in the country’s debt levels.

S&P downgraded the government one level to BBB-, its lowest investment-grade rating, from BBB. The new ranking is in line with countries including Spain and the Philippines and one notch below Russia. Yields on the country’s $2.15 billion of bonds due 2023 have climbed 1.01 percentage point in the past year to 4.26 percent, according to data compiled by Bloomberg.

The move ends a decade-long stretch of upgrades for Latin America’s biggest economy. Mixed signals from the government, with negative implications for fiscal accounts and economic policy credibility, also prompted the rating cut, according to S&P. The firm expects Brazil’s growth to slow to 1.8 percent this year from 2.3 percent in 2013.

“The downgrade reflects the combination of fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, a constrained ability to adjust policy ahead of the October presidential elections and some weakening in Brazil’s external accounts,” S&P said in a report. “These factors underscore the government’s diminished room for maneuver in the face of external shocks.”

The presidential press office deferred questions on the downgrade to the Finance Ministry, whose press office said by e-mail that it didn’t immediately have a response.

Quickening Inflation

Brazil’s growth has failed to return to the 7.6 percent pace in 2010.

Quickening inflation has prompted policy makers to boost interest rates by 3.5 percentage points since April after they had lowered borrowing costs by 5.25 percentage points since August 2011.

In almost half the instances, yields on government bonds fall when a rating action by Moody’s Investors Service and S&P suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back to the 1970s. When S&P downgraded the U.S. government in 2011, bonds rose and pushed Treasury yields to record lows.

S&P last upgraded Brazil in November 2011. The country is rated BBB by Fitch Ratings and an equivalent Baa2 by Moody’s Investors Service, which in October cut its outlook on the rating to stable from positive.

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