Despite being the last agency of the triumvirate to downgrade Brazil closer to non-IG status, the fact that Fitch kept the rating outlook negative makes the risk of Brazil losing its IG status (ie, having two non-IG ratings) even more acute now.
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Today’s actions, according to the rating agency, reflect Brazil’s rising government debt burden, increased challenges to fiscal consolidation and a worsening economic growth backdrop. Fitch Ratings lowered Brazil’s rating from BBB to BBB-, one grade shy of junk level, while maintaining its outlook negative.
The ‘BBB-‘ rating is one mark above speculative, or “junk” grade bonds. Earlier Thursday, before the downgrade was announced, Rafael Guedes, director of Fitch Ratings in Brazil, said a negative outlook means there is a 50% chance of a downgrade to the country’s rating in the next few years. Fitch now projects a government deficit of nine percent of GDP in 2015 for Brazil.
Brazil faces an economic recession fueled by lower commodities prices and a downturn in the economy of top trading partner China.
The rating agency noted that higher nominal GDP growth of 2.8 percent in the fiscal year was the key factor behind revenue growth.
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The Brazilian real lost ground in the currency market after the downgrade but modestly. Low approval ratings for her government amid a corruption scandal at state-controlled oil company Petróleo Brasileiro SA have sapped the president’s influence with legislators and halted the progress of the unpopular tax increases and spending cuts.
