Brazil’s Credit Rating at Risk of Cut to Junk Grade by S&P

Standard & Poor’s said it may cut Brazil’s credit rating to junk, citing the country’s political and economic challenges amid an ongoing corruption probe.

The ratings company said in a statement Tuesday it revised the outlook on Brazil’s rating to negative from stable. The country already is at BBB-, the lowest investment-grade level.

The ratings move adds to challenges for President Dilma Rousseff and her economic team led by Finance Minister Joaquim Levy as they duel with Congress to shore up fiscal accounts at the same time the country slips into recession. There’s a one-in-three chance that the government will slip in efforts to improve the economy, and that restoring growth will take longer than expected, S&P said.

“Everything is lining up to the downside for Brazil,” said Christian Lawrence, a foreign-exchange strategist at Rabobank Nederland in New York. “It’s hard to see much in the way of positivity.”

Brazil’s central bank declined to comment on the outlook change. Press officials for the presidency and Finance Ministry didn’t return requests for comments.

Capital Outflows

Juan Carlos Rodado, New York-based director of Latin America research for the French bank Natixis, said it’s not “crazy” to imagine the real weakening past 4 per dollar next year. China’s economic slowdown could portend lower prices for the commodities that Brazil supplies, he said.

“More capital ouflows are also likely,” Rodado wrote in an e-mail. “Brazilians will fly from the real as they see their savings in local-currency declining.”

Of the three biggest ratings companies, S&P has taken the toughest stance on Brazil. Moody’s Investors Service and Fitch Ratings have the country rated a notch higher, providing a bigger buffer from the junk-grade threshold.

A downgrade by S&P would undo the progress made under former President Luis Inacio Lula da Silva, who led the country in 2008 to obtain investment-grade status for the first time. At that point, S&P was forecasting that Brazil should be able to maintain annual growth of as much as 4.5 percent.

Brazil’s real is down 21 percent this year, the worst-performance in the world among major currencies. On Tuesday it gained 0.2 percent to 3.3568 per U.S. dollar in Sao Paulo.

Utility Probe

In Tuesday’s statement, the ratings company cited expanding corruption investigations in the country, which in late 2014 shut the state-owned oil producer Petroleo Brasileiro, the country’s biggest corporate borrower, out of the bond market for six months.

On Tuesday, police extended the probe to state-run utility Centrais Eletricas Brasileiras SA, Latin America’s largest utility. Investigators are looking into allegations that an executive of the company’s nuclear venture took bribes from construction companies in connection with a nuclear-plant construction contract.

Recession-Bound

Brazil’s economy is headed for its worst recession in a quarter-century, with analysts surveyed by the central bank forecasting a contraction of 1.8 percent this year. Levy, who took over as finance minister in January, had proposed a fiscal-austerity agenda that was deemed crucial to staving off a credit downgrade. Instead the government has been thwarted by lawmakers who rebelled amid rising unemployment and the president’s falling popularity.

Last week, Levy conceded that the government would miss its budget goals for this year as a shrinking economy erodes tax revenue. Even so, he played down the threat of a credit downgrade, saying the government’s backtracking hadn’t affected the country’s ability to meet bond commitments.

“This is not just about the severity of the economic downturn,” Nicholas Spiro, a managing director at advisory firm Spiro Sovereign Strategy, said by telephone from London. “It’s about Brazil’s rapidly-souring political environment that is undermining the entire reform effort.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE