Brazil’s rating takes a blow as fiscal troubles mount
The South American sovereign’s rating hovers one notch above junk after downgrade
Standard & Poor’s cut Brazil’s
sovereign rating a notch to BBB- on Monday as it berated the
country for its poor fiscal performance in the latest sign that
the emerging market stalwart may be falling out of favor with
|| Source: Amadeo
Dilma Rousseff’s government has come
under fire for overspending and letting its finances slip in
the months leading to the October presidential election. The
finance ministry in February announced that it would cut BRL44 billion ($19bn) from this year's
budget as policymakers sought to fight inflation and
tighten fiscal management.
But the move was too late to avoid a rating
downgrade that put the country — which met European bond investors last month —
just one notch into investment-grade status.
"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 statement on Monday night.
"Despite the recent budgetary reprogramming effort
that cuts some spending from the 2014 budget passed by
Congress, it will be difficult to achieve the formal 1.9% of
GDP primary surplus target without recourse to 'one-off
adjustments'," the statement added.
Brazil’s rating could improve if its
government shows more willingness to tackle its fiscal deficit
or if it acts to spur medium-term growth. However, the
country’s rating could come under further pressure
if its external and fiscal accounts deteriorate, S&P
The pressure was now on the Brazilian government to
restore the credibility that turned Latin
America’s largest economy into a leading emerging
market investment destination in recent years, analysts
"Ultimately the onus is on the authorities to react
to the loss of external creditworthiness by embracing a more
disciplined and conventional management of the economy ...
Failure to do so is likely to further depress market sentiment
and asset prices," Goldman Sachs analyst Alberto Ramos said in
S&P also cut Brazil’s long-term
local currency sovereign credit rating to BBB+ from A-, a
rating the agency said "reflects the credibility of its
monetary policy, its floating exchange-rate regime, and the
depth of its capital markets."
Brazil is rated Baa2 and BBB by
Moody’s and Fitch. LF