Standard & Poor’s stripped Brazil of its investment-grade credit rating on Wednesday, making it even harder for President Dilma Rousseff to regain market trust and pull Latin America’s largest economy out of recession.
The faster-than-anticipated downgrade, which will likely hit Brazilian financial markets on Thursday, is a major setback for Rousseff as she tries to kick-start the economy and shore up public finances.
S&P cut Brazil’s rating to BB-plus, which denotes substantial credit risk, from BBB-minus. The outlook on the new rating remains negative, which means additional downgrades are possible in the near term.
The stripping of investment grade status, which Brazil won in 2008, represents the loss of a key imprimatur that solidified Brazil’s emergence as an economic power during a decade-long commodities boom that reverted in recent years.
The downgrade is expected to increase borrowing costs for the government and, worse, Brazilian companies. It will also cause Brazilian assets to lose valuable funding because many institutional investors are not allowed to buy or hold onto investments that are not rated investment grade.
S&P said its decision was based on the mounting political problems that have muddled economic policy.
These problems, S&P said, have been weighing on the government’s “ability and willingness” to submit a 2016 budget consistent with the significant policy fixes Rousseff promised after she won re-election last year.
Even though some measures are being taken by pro-marked ministry Levy, he still lacks the political support to make all the needed changes.
When Brazil first got the coveted investment-grade stamp from S&P, after decades of financial volatility, it was considered a star among developing nations.
Leveraging soaring export and tax revenue at the time, the ruling Workers’ Party broadened generous social welfare programs and encouraged lending by public banks, fueling a prolonged consumer boom.
Combined, the measures lifted 40 million people out of poverty. Once Rousseff took office, however, the economy began to slow down sharply and last quarter it officially entered a recession. (Reporting by Walter Brandimarte; Editing by Cynthia Osterman and Kieran Murray)
What is yet to be seen is how much of the downgrade was already priced into the exchange rate and asset prices. Both the Brazilian reais and stock markets are down pretty significantly in the last 12 months so a lot of analysts believe it may be a case of “sell the rumor, buy the fact” but time will tell if this is really the case.