MEXICO CITY – Standard & Poor's downgraded the long-term sovereign debt rating of Latin America’s largest economy, Brazil, on Monday by a full notch, to BBB-, its lowest investment-grade rating, from BBB.
Bloomberg said Brazil now has the same rating as Spain and the Philippines, which are both rated one notch below Russia. The downgrade represents another headwind for Brazilian President Dilma Rousseff, who faces re-election this fall, as the economy has slowed down considerably from the boom it enjoyed during the prior decade.
Standard & Poor's, the New York-based credit ratings agency, clearly was not impressed by the president’s efforts to spur growth. It criticized the country’s sluggish economy, climbing debt levels and Rousseff’s unconventional accounting methods, and it said it foresees only a “mixed” chance for economic reforms before elections. S&P projects that Brazil’s GDP will expand by only 1.8 percent this year, following 2.3 percent growth in 2013 (compared with a 7.5 percent spike, which it had as recently as 2010).
"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. “These factors underscore the government’s diminished room for maneuver in the face of external shocks.”
The agency added that Brasilia’s fiscal credibility was "systematically weakened" by reductions in the government's budget target, while loans issued by state-controlled banks to stimulate spending and increase growth "undermined policy credibility and transparency." “This [rating] cut is a confirmation of the loss of credibility by the country, mostly in fiscal issues,” analyst Nathan Blanche told the Wall Street Journal. The latest downgrade represents an about-face from 2008, when Brazil’s bonds were granted an investment-grade status in the middle of the global financial crisis.
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Calling the S&P downgrade unwarranted, the Finance Ministry insisted that Brazil is enjoying strong economic fundamentals. "The Brazilian economy has low external vulnerability because it holds the fifth largest volume of international reserves among G20 nations," the ministry said in a statement. Indeed, Brazil’s 2.3 percent GDP jump last year outperformed that of most G20 states. "The move [by S&P] contradicts Brazil's strong fundamentals," the ministry added.
Not surprisingly, in an election year, some opposition leaders piled on Rousseff. Reuters reported that Aécio Neves da Cunha, a member of the federal Senate, blamed the downgrade of "manipulation" of fiscal accounts by Rousseff’s government, as well as "exorbitant" public spending and "leniency" with inflation. "Brazil is going through a sad moment of loss of confidence and ruined credibility," Neves added.
But Rousseff had at least two bits of good news from S&P – the agency did not push the country’s debt into speculative-grade region (which would have likely triggered massive unloading of Brazilian assets on global markets). In addition, S&P actually upgraded the outlook on Brazilian debt to “stable” from “negative,” suggesting further downgrades are not likely, at least in the near term. Moreover, the Journal reported, Standard & Poor's analyst Lisa Schineller said on a conference call that "we're very comfortable with Brazil in the investment-grade category."
Still, S&P warned of additional ratings cuts in the event it witnesses a “sharp” deterioration in the country’s external and fiscal accounts. "The pressure is on Brazil to make substantial changes in its fiscal policy. If it doesn't make these changes, they may cut again," Tony Volpon, of Nomura Securities in New York, told the Journal.
The two other major U.S. credit ratings agencies, Moody's Investors Service and Fitch Ratings, currently have investment-grade ratings on Brazil debt, both with “stable” outlooks.
In stark contrast to Brazil’s troubles, Latin America’s second biggest economy, Mexico, has enjoyed rave reviews from credit agencies, leading to speculation it may eventually topple Brazil as the region’s number one economy in the next few years. Early last month Moody’s awarded Mexico its coveted “A” sovereign debt rating for the first time in the country’s history, making it the second Latin American country – after Chile – at that level.
S&P’s current grading for Mexico is BBB+, two notches above Brazil's.