Daily Management Review

S&P Lowered the Rating of Brazil to Below Investment


09/10/2015


The agency points to difficulties in carrying out reforms and corruption scandal with Petrobras.



The rating agency Standard & Poors has lowered the sovereign rating of Brazil to below investment grade. The Agency believes that the current Brazilian government has difficulty in carrying out reforms in the economy and in the financial market. In addition, the government's position is detrimental to the widening corruption scandal with the country's largest oil company Petrobras.

Brazil's sovereign rating is lowered by one notch: from BBB- to BB +. In the statement, the agency said that “Brazil's credit profile has deteriorated on July 28 when we changed our outlook on the rating. Then, we have noted increase in risks for the implementation of correctional policy designated by the authorities, mainly because of the unstable situation in the Parliament related to the consequences of the corruption scandal around the state oil company Petrobras”. Corruption scandal around the state oil company has been raging for a long time and has already cost the freedom for one of the former top managers of the company. In addition, public pressure was laid on the current president Dilma Rousseff, whom resignation Brazilians are demanding. The fact is that she headed Petrobras at the very time when, according to investigators, the company operated under corruption schemes included bribes for contracts, as well as money laundering.  

Also, the agency notes that “the country's budget proposals for 2016, made in late August, contain the new revision of the government's fiscal targets. The proposed budget is based on a deficit of 0.3% of GDP, while the surplus of 0.7% had been pronounced in July. This change reflects internal disagreements over the package of measures needed to remedy the situation”.

The ratio of debt to Brazil's GDP is nearly 69%, and this, according to many analysts, shows that the new downgrade is quite likely. For example, in other Latin American countries – precisely, Puerto Rico, which is now on the verge of default, the ratio is 70%. In addition, the yield of Brazilian bonds is 14.8% - this is one of the highest among the major developing countries. According to the analyst from Barclays Research Bruno Rovai, “negative rating outlook opens up the possibility of a new reduction in the course of next year. In our view, the probability of a new decline is not low”. Ana Galvao, Associate Professor of economic modeling and forecasts at Warwick Business School Coventry University notes that “the Brazilian economy is reaping the benefits of non-traditional monetary and fiscal policy 2010-2014. And given the political instability and corruption scandals, all of this together was the reason for the downgrade of Brazil to "junk" level”. The expert explained that “the end of the commodity boom, the liberal US monetary policy and the reduction of the rate of Chinese economy’s development have contributed to the reduction in Brazilian exports and economic growth. At the same time, the years of rapid economic development of Brazil and the growth of tax revenues was marked by expansion of the public sector, which now – on the background in tax revenues - is very hard to stop”.

source: bbc.com






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