S&P cuts Brazil rating to one notch above junk

Standard & Poor’s has cut Brazil’s sovereign debt rating to one notch above junk-bond status, citing concerns over the country’s economic credibility, fiscal management, and weak growth in the years ahead.

The rating agency on Monday reduced Brazil’s long-term foreign currency sovereign credit rating to BBB- from BBB, its lowest investment-grade rating, in a decision that could prompt similar downgrades by Moody’s and Fitch Ratings.

The move comes as a blow to President Dilma Rousseff, who has struggled to revive Latin America’s biggest economy and regain the trust of investors ahead of presidential elections in October.

“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 account,” S&P said in a note.

However, the agency also changed Brazil’s outlook to stable from negative, reducing the risks of further downgrades in the near future. “

The stable outlook reflects our view of institutional and balance sheet strength,” Lisa Schineller at S&P said on a conference call on Monday. “It is not that we see policy unravelling,” she said.

S&P highlighted Brazil’s “well-established political institutions, broad commitment to policies that maintain economic stability, and its large and diversified economy.”

The downgrade comes after growing criticism over Brazil’s handling of its fiscal accounts and its reliance on one-off items and “creative accounting” to meet official fiscal targets.

The agency also cast further doubt over the government’s promises last month to cut $18.5bn in public spending to meet its current target.

“It will be difficult to achieve the formal 1.9 per cent of GDP primary surplus target without recourse to “one-off adjustments,” in our view, given low growth and the continuation of some tax exemptions,” S&P said.

The agency pointed to the country’s recent disappointing economic performance and its “subdued outlook for growth over the next two years”. After expanding 7.5 per cent in 2010, the country only grew 1 per cent in 2012 and 2.3 per cent last year.

“Low growth prospects reflect both cyclical and structural factors, including investment as a share of GDP of only 18 per cent in 2013 and a slowdown in growth in the labour force,” S&P said. “Combined, these factors underscore the government’s diminished room for manoeuvre in the face of external shocks.”

This story has been amended since publication to show that Brazil’s long-term foreign currency sovereign credit rating before Monday’s downgrade was BBB not BBB+.