Standard & Poor's cut Brazil's sovereign credit rating to junk Wednesday, citing the struggle of President Dilma Rousseff's government to master mushrooming debt and political turmoil. The downgrade to junk-bond status is a blow to Brazil because it could drive off investors even as Rousseff and her finance minister, Joaquim Levy, battle to balance the books.
The New York-based rating agency cut Brazil's long-term rating from a BBB- to BB+, meaning its debt is deemed to have "significant speculative characteristics". "You have got an economy that has really hit the skids. It has been in recession for the better part of two years - if anything you could probably call it stagflation," said David Rees, senior markets analyst at research house Capital Economics in London.
"The only way they are going to get out of that situation is through a reform drive," he told AFP. "But the political situation suggests that there is very little chance of that happening." Last month Brazil's finance minister presented the country's first ever deficit budget for 2016 and he is now under pressure to raise taxes despite heavy opposition in Congress.
The government also announced in August that the economy was officially in recession and that the contraction could extend through 2016, becoming the longest recession since 1931. It marks a dramatic change for Brazil, which saw economic growth peak at 7.5 percent in 2010 during a global commodities boom, which has since vanished. Analysts say Latin America's biggest country - the host of next year's Summer Olympics - now faces a prolonged downturn.
"The political challenges Brazil faces have continued to mount, weighing on the government's ability and willingness to submit a 2016 budget to Congress" consistent with economic targets, Standard & Poor's said. "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," the agency said in its statement.
Other risks in Brazil include "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." Analyst Andre Leite at TAG Investimento noted that Brazil now finds itself rated lower than Russia, which is under painful international sanctions over its support for separatists in neighbouring Ukraine. "If another rating agency also lowers Brazil, then very probably we're going to see institutional investors obliged to pull their money out," Leite said.
Planning Minister Nelson Barbosa said the downgrade was a "surprise" but not insurmountable. "This news is not good but it can be reversed and we are working to do so. The Brazilian government has all the tools to resolve the country's fiscal issue," he said. Levy in turn sought to downplay the development. "Brazil is a country that is not on the brink of a crisis," Levy argued. "It is a country that is retooling for the very different global outlook. And the sooner we make the adjustments, the less this change is going to be felt, and we will be able to grow again," he told TV Globo.
Standard & Poor's reasoning reads like an investor horror show, starting with "spillover effects" from the still-unfolding corruption scandal centered on state-owned oil giant Petrobras. Petrobras lost $2.1 billion in a scheme where top Brazilian executives and politicians are said to have robbed the company by cooking up inflated construction contracts in exchange for bribes. That scandal, which continues to grow, has badly hurt investor confidence and contributed to rock-bottom approval ratings for Rousseff, with some in Congress pushing for her impeachment.
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