Brazil's Rating Cut Further Into Junk Territory by S&P

Updated on
  • Foreign-currency debt rating is lowered to BB from BB+
  • S&P has negative outlook on Brazil sovereign credit rating

Brazil’s debt rating was cut deeper into junk territory by Standard & Poor’s, which cited fiscal and political challenges for Latin America’s largest economy.

The long-term foreign-currency rating was reduced one level to BB with a negative outlook, S&P said in a statement Wednesday. The new level, two steps below investment grade, puts Brazil on par with countries including Bolivia, Paraguay and Guatemala. Petroleo Brasileiro SA, the battered state-run oil giant, had its rating cut two notches to B+, four below investment grade, S&P said in a separate report.

Brazil is in the midst of its worst recession in more than a century after a tumble in commodities and a slowdown in China, the country’s biggest trading partner, sapped revenue from exports including oil, iron ore and soybeans. The real has tumbled almost 30 percent in the past year, the worst performance among major currencies worldwide, after the country lost its investment-grade rating last year amid a record budget deficit and political turmoil that has hampered efforts to make fiscal adjustments.

“The political and economic challenges Brazil faces remain considerable,” S&P said in the statement. “We now expect a more prolonged adjustment process with a slower correction in fiscal policy, as well as another year of steep economic contraction.”

The Ibovespa stock gauge and the real pared gains after S&P’s announcement.

Brazil lost its investment-grade rating from S&P in September, and Fitch Ratings cut it into junk territory in December, with a negative outlook. In December, Moody’s Investors Service put the country’s Baa3 rating, the last level of investment grade, on review for a cut.

"The main message is that ratings agencies do not want to give anymore the benefit of the doubt to Latin America," Juan Carlos Rodado, director of Latin America research at Natixis North America, said in an interview from New York. "The other agencies will follow of course. The only glimpse of hope is political change."

President Dilma Rousseff is confronting efforts to impeach her over the way she accounted for government finances, a political drama that has kept Congress from efforts to stoke a rebound in the economy and clamp down on inflation that’s at the highest in 12 years. While the effort to oust Rousseff lost momentum as lawmakers took a more than five-week year-end recess and government supporters contested the process before the Supreme Court, the impeachment proceedings continue to dampen sentiment, S&P said.

The government has acknowledged it will fail to meet 2016 surplus target before interest payments of 0.5 percent of gross domestic product and will propose a flexible fiscal goal to Congress, according to two members of the government’s economic team, who asked not to be identified because the matter isn’t public.

"We perceive less certainty within the president’s cabinet on fiscal policy," S&P said. "Despite government plans to table structural reform, such as on pensions, we expect the political environment after the conclusion of the impeachment process to also limit the viability of reforms -- regardless of who is president."

— With assistance by Benjamin Bain, and Julia Leite

(Updates with Petrobras downgrade in second paragraph.)
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