Brazil’s rating takes a blow as fiscal troubles mount

Brazil’s rating takes a blow as fiscal troubles mount

Brazil Corporate & Sovereign Strategy

  Source: Amadeo Junior 
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.

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 a statement.

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