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Fitch downgrades Brazilian sovereign rating to BB-

Credit rating agency Fitch today downgraded Brazil’s sovereign rating to “BB-” from “BB”, and changed the outlook from negative to stable.

According to the agency, the cut reflects the persistence of the large fiscal deficit, a high and growing government indebtedness and the failure of legislative reforms that could improve the structural performance of public finances.

S&P Global Ratings had already cut the Brazilian note. Last month, the agency downgraded Brazil’s rating to “BB-“, with a stable outlook.

Fitch noted that “the government’s decision not to put Congressional Pension reform to vote anymore represents a major setback on the reform agenda, which undermines confidence in the medium-term trajectory of public finances and the political commitment to address the issue”.

According to the agency, “the occurrence of a presidential and legislative election in October means that pension reform will only occur after the election and that leaves uncertainties as to whether the next administration will be able to get approval in a timely manner”.

Fitch pointed out in the analysis that the Brazilian fiscal deficit “remains large and with the prospect of only a gradual decline.” For the agency, the deficit reached 8% of GDP in 2017, a result well above the median of 3% for countries in the same Brazilian sovereign note range, “BB”. The agency also projects that the average public deficit will reach 7% of GDP between 2018 and 2019.

Government general debt reached 74% of GDP in 2017, meaning significantly above the 45% of GDP of the bloc countries with a “BB” rating. Fitch predicts that public debt will reach 80% of GDP in 2019 and maintain growth in the coming periods.

According to the agency’s analysts, “social security reform and other spending adjustment measures appear to be essential components of any strategy to facilitate fiscal consolidation, boost confidence in the medium-term public finance trajectory, and make the spending ceiling, an important anchor of fiscal policy, viable and credible in the medium term”.

The agency also commented on the transfer of R$ 130 billion to the government by the BNDES in an operation to repay resources borrowed by the Treasury as a factor that could “ease debt growth this year”. But the agency considered the measure as “insufficient” to stabilize the public sector’s debt path, as it is a one-off event.

Despite calling attention to the uncertainties and challenges associated with the election this year, Fitch said “do not anticipate a turnaround toward greater state interventionism and populism as a result of the campaign.

Read more about Brazilian macroeconomics

Government is now evaluating changes to the pension plan without touching the constitution

After giving up on the Social Security reform – amid federal intervention in the security area of ​​the State of Rio de Janeiro, a measure that prevents changes in the Constitution while it is in force – ministers of the economic area now study changes in pensions that do not depend on constitutional amendments, said journalist Miriam Leitão in her blog on the website of the newspaper “O Globo” and in her participation in TV Globo’s “Bom Dia Brasil” program earlier.

The changes could be made during the federal intervention in Rio without even having to suspend the “state of exception”, says the columnist.

According to her, the ministers have studied measures that can improve the situation of the public accounts without moving on the Brazilian Magna letter. The idea would be to prioritize simpler procedural issues, without depending on the approval of three-fifths of each house of Congress in two rounds, as is the case of amendments.

The focus now would be on rules that change the benefit calculation and bring some fiscal relief in the future.

S&P Downgrades Brazilian Credit Rating to BB-

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Standard & Poor’s (S&P) downgraded Brazil’s sovereign credit rating from “BB” to “BB-” on Thursday. The rating was already in Junk territory, but it is now three steps below investment grade. On the other hand, the perspective for the rating has changed from negative to stable.

The downgrade was already expected by the market due to difficulties the government is facing to get the pension reform approved.

In the justification for the decision, the agency pointed out as “one of the main weaknesses of Brazil” the delay in approval of fiscal measures that rebalance the public sector accounts.

“Despite several advances by the Temer administration, Brazil has made slower-than-expected progress in implementing significant legislation to address structural fiscal issues and rising levels of indebtedness”, S&P said in a statement, adding that uncertainties of the 2018 elections aggravate this scenario.

In addition to the difficulty in approving reforms with long-term effects, S&P also pointed out that “there have been setbacks even with short-term fiscal measures – such as the decision to suspend the postponement of salary increases for public sector employees”.

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Fitch keeps the Brazilian credit rating at BB, with negative outlook

Fitch Ratings reinforced Brazil’s credit rating on ‘BB’, with a negative outlook. That is, with the possibility of the classification being revised downwards in the future.According to the agency, the country’s ratings is limited by the structural weaknesses in public finances and high government debt, weak growth prospects and weaker governance indicators than the country’s peers, in addition to the recent history of political instability.

These weaknesses, Fitch added, are offset by the economic diversity of Brazil and consolidated civil institutions.

The negative outlook reflects the continuity of uncertainties related to the sustainability and strength of the Brazilian economic recovery, the prospects for medium-term debt stabilization and the progress of the legislative agenda, especially the pension reform.

Fitch expects a modest cyclical recovery in Brazil, with growth accelerating from 0.6% in 2017 to an average of 2.6% during 2018 and 2019. Consumption began to recover, sustained by lower inflation, which drives wage gains, stabilization of the unemployment rate and a recovery of consumer credit. A recovery in investment is also expected in the coming years.

According to the agency, the risks that can cause the government not to reach its fiscal goals in the short term include a weaker economic recovery and the difficulty in cutting public spending, especially in the election year. The implementation of the pension Reform and other adjustments will be necessary to ensure that expenditures meet the target in the medium term.

Fitch projects that Brazilian public debt will continue to grow during the forecasted period, even taking into account the impact of the National Treasury’s loan payments anticipated by the National Development Bank (BNDES) between 2017 and 2018. The agency projects that debt will reach 76% of GDP in 2017 (above the median of the “BB” countries, 45%) and advance to 80% in 2018.

Brazil’s current account deficit is expected to fall below 1% in 2017, according to Fitch projections, and should remain below 2% in the period projected by the agency. The deficit fell 80% during the first nine months of 2017, compared to last year, with the growth of the trade surplus.

Brazil Bull Who Got It Right in 2002 Says This Time No Different

The selloff punishing Brazilian markets in recent months isn’t fazing Jerome Booth. He’s seen it before and says just like then, it’s way overdone.Yes, Brazil has serious problems. The country’s “a mess,” he says, with a massive corruption investigation at state-run oil company Petroleo Brasileiro SA, a worsening fiscal outlook, the steepest recession in 25 years and a political system so fractured that needed reforms just aren’t getting done. That’s not to mention a credit-rating cut to junk and the currency’s plummet to a record low.

But there’s no chance the government is going to default, and politicians eventually will find the will to push through measures to shore up the budget and restore growth, Booth said in an interview in New York. The panic among investors is excessive, just like 13 years ago when bond prices collapsed along with the currency amid concern the front-runner in presidential elections would repudiate the government’s debt, said Booth. He was then head of research for Ashmore Investment Management, at the time one of the biggest dedicated emerging-market sovereign bond holders.

“You’ve got the classic ‘everything’s as bad as it can possibly be’” situation, said Booth, the chairman of New Sparta Asset Management, an investment company he started after leaving Ashmore in 2013. “But it’s all priced in now.”

Brazil’s overseas bonds are close to reaching bottom, according to Booth, after losing investors 8.3 percent this year. Only Zambia has posted worse returns among more than 60 emerging-market countries tracked by JPMorgan Chase & Co. indexes. Brazil’s currency, which gained 0.7 percent Monday as of 2:03 p.m. in New York, is still down 32 percent against the dollar this year, the most among major emerging markets.

After three sovereign rating cuts in the past three months, one of which cost Brazil its investment-grade rating, the government will put a “proper economic program” in place and restore investor confidence, Booth said.

“I would think it’s months rather than a year,” he predicted.

What makes Booth confident even as shops from BlackRock Inc. to Federated Investors Inc. and RBC Capital Markets see reasons to avoid Brazil?

Because he thinks most investors have overestimated the risk, just like in 2002. Back then, a selloff hit ahead of the presidential election as Luiz Inacio Lula da Silva gained in the polls. The concern was that the former union leader and founder of the Workers’ Party would declare Brazil’s debt illegitimate. Observers worried the country was slipping backward just a decade after shaking off a legacy of hyperinflation and political instability to become one of the world’s brightest stars among developing nations.

The real plunged to a record low, average yields on the country’s bonds soared to more than 25 percent and the benchmark stock gauge tumbled 40 percent ahead of the vote.

“The hedge funds at that point had this view that there’s a thing called a self-fulfilling prophecy,” Booth said. “They knew one thing: If all their peers in New York were negative,” then Brazil “would fall over. I thought that was just nonsense.”

In fact, when Lula won, investors were rewarded. From his inauguration at the start of 2003 until he left office at the end of 2010, Brazil’s dollar-denominated bonds returned 256 percent, more than double the emerging-market average. Real-denominated notes advanced 520 percent in dollar terms, almost three times the average for peers. The currency more than doubled in value against the dollar, and stocks surged 500 percent.

While Booth had money at stake when he made his call in 2002, this time around he’s not investing in Brazil’s markets. After leaving Ashmore in May 2013, he established London-based New Sparta, through which he manages investments in U.K. phone company New Call Telecom and a magazine publisher, among other businesses. New Sparta funded the Drew Barrymore comedy “Miss You Already,” which premiered at the Toronto International Film Festival last month.

Still, from his vantage point, Booth says investors are too worried about developing countries. Emerging-market assets have dropped for most of this year amid concerns the Federal Reserve will raise rates and as the Chinese economy shows signs of deceleration.

“1998 was the last time when you had a systemic crisis which could have led to serial defaults over emerging markets,” Booth said. “We haven’t had that, and we’re not likely to have that again.”

Fitch plays down 2-notch downgrade for Brazil

A director at Fitch Ratings on Monday played down the possibility of Brazil losing its investment-grade status during its next rating revision, saying the ratings agency “does not usually” give two-notch downgrades, barring exceptional cases.

However, Rafael Guedes, Fitch’s managing director for Brazil, said the possibility of an imminent one-notch downgrade is higher than 50 percent. He also noted that in 2002 the agency downgraded Brazil twice in the same year.

Fitch rates Brazil at BBB, two notches above junk, with a negative outlook. Competing ratings firms have already downgraded Brazil this year – Standard & Poor’s to BB-plus, in junk territory; and Moody’s Investors Service to Baa3, its lowest investment-grade rating.

Investors and even the Brazilian government expect Fitch to catch up with its peers, but the main question has been whether or not it will keep the country’s coveted investment grade.

A second downgrade to junk status is expected to have an even greater market impact than the first, as many investors are required to hold securities with investment-grade ratings from at least two ratings agencies.

Fitch representatives met with Brazilian policymakers last week in Brasilia and a decision on the country’s rating could come at any moment. Fitch has kept a negative outlook on Brazil’s ratings since April.

Guedes said Fitch’s decision will take into account the likelihood of President Dilma Rousseff getting Congress to pass the austerity measures needed to plug next year’s budget gap.

“The measures are not difficult to approve, but the government has no support in Congress,” he said in an event in Sao Paulo.

Guedes said that Brazil’s debt dynamics will not stabilize even if the government delivers a primary budget surplus of 0.7 percent of gross domestic product and the economy grows 1 percent next year. The Brazilian economy is expected to contract 1 percent in 2016.

Brazil downgrade leaves little choice but austerity for Rousseff

Brazil’s government scrambled yesterday to reassure investors it will impose austerity measures to put public finances in order after its credit rating was downgraded to junk status.

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 plan is to come up with something in the next couple of weeks that we can work on with Congress,” Finance Minister Joaquim Levy told journalists.

The Standard & Poor’s rating agency on Wednesday stripped Brazil of its hard-won investment grade rating, downgrading it to “junk” sooner than the government and investors had expected.

The downgrade appeared to strengthen Levy’s position. He has been the government’s face of austerity but his push for deeper spending cuts to improve Brazil’s finances and avoid a downgrade faced resistance inside the cabinet and Congress.

Read more: Unlike S&P, Fitch still sees elements supporting Brazil’s investment grade

Unlike S&P, Fitch still sees elements supporting Brazil’s investment grade

Fitch Ratings still sees elements supporting Brazil’s investment grade, a senior analyst with the ratings firm said on Thursday, easing market fears the agency could follow Standard & Poor’s decision to cut the country to junk.
Speaking at a Fitch conference in New York, analyst Shelly Shetty said that Brazil’s credit rating is deteriorating and that there is a greater than 50 percent chance it will be downgraded.
But a one-notch downgrade would still leave Brazil with investment grade, because Fitch currently has the country at BBB, or two notches above junk level, with a negative outlook.

“There are clearly elements which still buttress the investment-grade credentials,” Shetty told investors, citing Brazil’s economic diversity, per capita income levels, and the government’s net creditor position in dollars.