S&P Says Brazil's BB Rating May Be Cut on Political Uncertainty

  • S&P rates Brazil at BB, two steps below investment grade
  • President Temer has been accused of obstruction of justice

Aviva's Ballard Says Brazil Is in a Tough Position

S&P Global Ratings said it may cut Brazil’s sovereign credit rating as the nation’s fiscal adjustment is at risk of stalling amid surging political uncertainty following allegations against President Michel Temer.

The ratings company placed the grade on the country’s debt on credit watch with negative implications, which means it may be downgraded in the next three months. S&P rates Brazil at BB, two steps below investment grade.

Temer’s ambitious reform agenda was thrown in disarray last week on allegations the president was recorded endorsing the payment of hush money to the jailed former lower house speaker Eduardo Cunha. Temer, who has vehemently denied wrongdoing, saw support for his administration deteriorate further over the weekend as PSB, a key coalition partner, joined the opposition in calling for his resignation. Political risk consultancy Eurasia now sees a 70 percent chance he doesn’t complete his term compared to 20 percent previously.

"Should these recent allegations against President Temer be corroborated, the president’s ability to remain in office and govern effectively would likely become untenable," analysts led by Lisa Schineller wrote. "This could set in motion a transition process that has not been tested before."

In a statement, Brazil’s finance ministry reaffirmed its commitment to economic recovery through structural reforms aimed at balanced public accounts, sustainability of public debt and sustained growth.

Last week, Fitch Ratings affirmed Brazil’s rating despite the fresh political turmoil, and kept a negative outlook.

Temer’s administration last year successfully passed a bill that limits government spending for up to 20 years and had been working to gain support for another measure that curbs pension outlays. The worsening of Brazil’s public accounts was one of the main factors that prompted its loss of investment grade in 2015.

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