Brazil gets second junk rating
BRAZIL’s credit rating was cut to junk by Fitch Ratings, which became the second major ratings company to strip the country of its investment grade as it heads into its longest recession.
BRAZIL’s credit rating was cut to junk by Fitch Ratings, which became the second major rating company to strip the country of its investment grade as Latin America’s biggest economy heads to its longest recession since the Great Depression amid political turmoil.
The outlook for the rating is negative, meaning more downgrades may be coming, Fitch said yesterday as it lowered the grade one step to BB+. Brazil’s currency, the real, extended declines, the country’s overseas bonds tumbled, and interest rate swaps soared on expectations of higher borrowing costs.
Brazil’s economy is contracting, legislators have not shown the will to shore up the budget, and efforts to impeach the president are adding to political turmoil and distracting from efforts to fix the situation, Fitch said.
Fitch’s move, coming three months after Standard & Poor’s cut the country to the equivalent level, may shrink the pool of investors that consider buying the country’s securities since many institutions such as pension funds forbid investments in assets rated junk by at least two major rating companies.
The rating cut will add to pressure on President Dilma Rousseff and her economic team, who are struggling to gain support in congress to pass measures to raise taxes and lower spending as she fights impeachment efforts.
Fitch first gave Brazil an investment-grade rating in May 2008, during the country’s commodities-led boom. It lowered the rating to the brink of junk in October.
The real weakened 1.8% to 3.9407/$ in New York, bringing its decline this year to 33%, the worst in emerging markets. Brazil’s $4.3bn of bonds due in 2025 dropped 1.87c to 82.98c on the dollar, near the lowest since they were sold two years ago. Interest rate swaps maturing in January 2017, a gauge of expectations for borrowing costs, soared 0.17 percentage point to 16.15%.
Even before Fitch’s announcement, Brazil’s real and stocks were leading global declines on speculation that the government will lower next year’s budget target, underscoring its inability to shore up the country’s finances.
Ms Rousseff’s supporters on the congressional budget committee will introduce an amendment to next year’s spending bill that would allow the administration to aim for a surplus before interest payments of 0.5% of gross domestic product, said Paulo Pimenta, the government’s leader on the committee. Ms Rousseff previously had wanted to target a so-called primary surplus of 0.7%.
Finance Minister Joaquim Levy and Ms Rousseff have already agreed that he will leave the government because of their disagreements over policy, Valor Economico columnist Claudia Safatle wrote yesterday.
Ms Rousseff’s media office did not immediately respond to request for comment on Mr Levy’s status or the downgrade by Fitch.
Last week, Moody’s Investors Service put Brazil’s Baa3 rating, the lowest investment grade, on review for a downgrade, citing the challenges the government faces in improving fiscal accounts while a corruption scandal paralyses congress.
The rating company said a turnaround next year appeared unlikely.
While investors in the past have been split over whether impeachment would be positive for Brazil, some now say it may be the only way to resolve a months-long political stalemate that has prevented legislators from focusing on shoring up the budget and kick-starting economic growth.
Meanwhile, the supreme court justice who suspended impeachment proceedings against Ms Rousseff last week, has reportedly unexpectedly shown support for a secret ballot in congress that hurt her chances of blocking the process. A copy of Judge Luiz Fachin’s recommendation, obtained by the Folha de S Paulo newspaper and the GloboNews 24-hour cable news channel, showed he would argue before the court yesterday that the secret vote was legitimate.
The 11-member supreme court must still rule on the secret ballot, and the decision could go against Judge Fachin’s opinion.
A court official said a decision was unlikely before today because there was likely to be a lengthy discussion.
The impeachment proceedings, started this month by Ms Rousseff’s arch-enemy, lower house speaker Eduardo Cunha, risk plunging Brazil deeper into political turmoil as the government struggles to tackle the deepest recession since the early 1990s.