Brazil’s Outlook Downgraded To Negative, Credit Rating At Risk Of Cut To Junk: S&P

Standard & Poor’s (S&P) downgraded Brazil’s outlook to negative from stable on Tuesday and warned that it may cut the nation’s credit rating to junk amid their political and economic challenges and an ongoing corruption probe.

S&P affirmed Brazil’s credit rating at BBB-minus, the lowest possible investment grade rating, and could downgrade the nation over the next 12 to 18 months.

The nation’s broadening of its corruption investigations of politicians and companies jeopardize the government’s efforts to adopt policies that could help Brazil preserve its investment-grade rating, S&P said.

The move by S&P adds to the mounting challenges for President Dilma Rousseff and her administration as they grapple to shore up fiscal accounts at the same time the country slips into recession.

Amid growing calls for impeachment, President Rousseff’s approval rating tumbled to a new low of 15.3 percent in June, according to a recent poll by the National Transport Confederation (CNT).

S&P’s outlook review of the nation has spooked investors as the Brazilian real fell for the fifth day on Tuesday to a 12-year low.

Last week the Brazilian real tumbled 5 percent as Finance Minister Joaquim Levy asked lawmakers to cut the budget surplus target before interest payments as tax collection eroded.

S&P said it believes that there is a “greater than one-in-three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected,” according to a statement.

Following the S&P move on Tuesday, a Reuters poll showed that 23 of 28 market participants believe that S&P will downgrade Brazil’s credit rating to junk status by the end of next year, and 20 expect at least one other agency to follow suit.

The Reuters poll also showed that most of those who don’t see a downgrade next year believe it is only a matter of time, as only two respondents expect Brazil to retain its investment-grade status by the end of 2018, when Rousseff leaves office.

Last year S&P gave Brazil its first sovereign downgrade in more than a decade.

On July 23, Austin Rating, a Brazilian rating firm stripped Brazil of its investment grade status as it believes that Rousseff’s new budget savings goals are insufficient to stabilize the country’s growing debt burden.

Austin Rating cut Brazil’s foreign-currency debt to BB-plus, or junk status, and the local-currency debt to BBB-minus, its lowest investment-grade rating.

In April Fitch Ratings cut Brazil’s outlook to negative from stable.