S&P Downgrades Brazil’s Credit Ratings to Junk Status

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – A week after Brazil’s government presented a forecast of a deficit in its 2016 budget, rankings agency, Standard & Poor’s downgraded the country’s long-term foreign and local currency sovereign ratings to ‘BB+’ and ‘BBB-‘, respectively, taking away its investment grade.

The agency stated in its release that the political challenges faced by Brazil are weighing on the government’s ability to conduct policy corrections promised by President Dilma Rousseff during her second term in office.

“The negative outlook reflects what we believe is a greater than one–in–three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position, potential key policy reversals given the fluid political dynamics, including a further lack of cohesion within the president’s cabinet, or due to greater economic turmoil than we currently expect,” said the note released by S&P Wednesday night.

The agency noted the internal disagreement among Rousseff’s cabinet members on the composition and magnitude of measures needed to improve public finances. “The series of events leading to the budget proposal suggests to us diminished cohesion within President Rousseff’s cabinet and contributes to our assessment of a weaker credit profile,” explains S&P.

The reaction by government officials was almost immediate. “[Brazil] is not on the verge of a crisis. It’s a country trying to adapt to a very different global environment, so the quicker we adapt the less cost this transition will have and we will be able to return to grow in this environment,” said Finance Minister Joaquim Levy in an interview to TV Globo after the downgrade announcement.

The response by Congressional representatives to S&P’s decision ranged from blaming the government for the situation to diminishing the importance of investment grade to the country’s economy.

“Brazil today lost its investment grade due to the succession of erroneous economic policies of the last six years,” said Senator Aecio Neves, who ran against President Rousseff for the Presidency in the 2014 elections. “Unfortunately the loss of investment grade and the perspective of a negative revision (by S&P) in the next twelve months shows that President Rousseff’s government is over.”

“The loss of investment grade is irrelevant to us. It is an attempt to intimidate the government. We are increasingly becoming hostage to Minister Joaquim Levy and the neo-liberal system,” said House Representative Andre Figueiredo. “This downgrade is proof that Levy does not represent security to the market; he was unable to calm down investors,” concludes the congressman.

Although financial analysts were expecting the withdrawal of the country’s investment grade by credit ranking agencies, many had anticipated the decision would only come at the end of the year. “This was expected and it was more of a question of ‘when’ than of ‘if’, said economist Roberto Luis Troster in an interview to G1 website. “Either Brazil reacts rapidly or we will have an increasingly lower growth rate. Everyone is at one speed while we are at half that speed,” he concluded.

Two other ratings agency also reduced Brazil’s credit ratings in the last few months. Fitch Ratings in April gave a negative perspective of the country’s credit ratings while Moody’s lowered Brazil’s marks from Baa2 to Baa3, which still implies investment grade. Analysts interviewed by local media in Brazil say they expect the other two agencies to follow in S&P’s footsteps in the near future.