Brazil’s global investment grade was cut by Standard & Poor’s on Wednesday, with the redit ratings agency warning that it could be further downgraded in the next few months.
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The ratings agency said the move was in response to last week’s submission by Ms Rousseff of a budget bill that projects a fiscal deficit for 2016. S&P had said the budget fiasco, and the tensions within government it demonstrated, had been a key reason for the downgrade to the highest junk rating of BB-plus, from BBB-minus.
While geoeconomic factors – particularly slumping commodity prices and slower growth across the developing world – have contributed to Brazil’s slide, the country’s predicament is more about politics than economics.
Ms Rousseff’s left-wing government had imposed austerity measures in a bid to avoid such a downgrade.
S&P downgraded Brazil – Latin America’s largest economy – sooner than had been expected.
Brazil’s Finance Minister Joaquim Levy is seen coming out of the Finance Ministry in Brasilia, September 3, 2015.
Pension and mutual funds which can only hold investment-grade assets will now offload Brazilian government bonds at a brisker pace, in anticipation of similar downgrades by Moody’s and Fitch (typically, two of the big three rating agencies need to declare junk status to force divestment).
The lawmaker was referring to the millions of people who have taken part in rallies to protest Rousseff’s administration, some of whom have called for her resignation or ouster.
President Dilma Rousseff called an emergency cabinet meeting to brainstorm on policies to bridge a fiscal shortfall and how to win their approval by a Congress that has been reluctant to sign off on unpopular belt-tightening measures. The news is a further blow to her government’s credibility, which has been mired for the past year in a vast corruption scandal involving the state oil company Petrobras.
“Brazil is a country that is not on the brink of a crisis”, Levy said.
Political analyst Gabriel Petrus, at Barral M Jorge consultants, said opponents now have Rousseff over a barrel – so weak that she will abandon the PT project in return for cooperation.
In a report issued Thursday, HSBC analysts Alejandro Martinez-Cruz and Constantin Jancsó assured, “The negative outlook reflects that further fiscal deterioration is not being ruled out and this may trigger additional rating actions over a 12-month period”.
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Brazil’s economic output shrank 1.9 percent in the second quarter of this year, according to official data released last month.
