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 investors.
|| 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 said.
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 said.
"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
Brazil is rated Baa2 and BBB by Moody's and Fitch.