SAO PAULO: Standard & Poor's on Tuesday said Brazil could lose its coveted investment-grade rating in the coming year if fallout from a number of corruption investigations further stymies economic growth and the implementation of austerity measures.
The warning, which sent Brazil's currency tumbling, is a setback to Finance Minister Joaquim Levy's efforts to win back investor confidence in Latin America's largest economy, now in a steep recession.
S&P affirmed Brazil's credit rating of BBB-minus, the agency's lowest investment grade rating, and revised the outlook on that rating to negative from stable, signaling a downgrade is possible over 12 to 18 months.
The Brazilian real slid 2 percent after S&P's announcement to as many as 3.43 per dollar, the weakest in more than 12 years. "This is the consequence of years of bad fiscal policies.
They are finally taking their toll on Brazil," said Will Landers, who oversees $2.1 billion in Latin American equities at BlackRock Inc.
"We need to see how the government deals with this decision." S&P said in a statement that political and economic risks to the implementation of Levy's fiscal austerity policies have risen. "We believe (there) is a greater than one-in-three likelihood that the policy correction will face further slippage and that the return to a firmer growth trajectory will take longer than expected," S&P analyst Lisa Schineller said in a statement.
Although some government officials had fretted about Brazil's ratings, few saw the S&P revision coming so soon. "This caught the team by surprise," a Finance Ministry official said.
Levy has been trying to retain Brazil's investment grade rating through spending cuts and tax increases aimed at curbing fiscal deficits that balooned during President Dilma Rousseff's first term. But his strategy has fallen short. Last week, the government slashed its budget savings target for this year and the next.
Government revenues have plunged since the beginning of the year as Brazil sank into a deep recession.
The economy is expected to shrink this year and possibly in 2016. Inflation remains above target, forcing the central bank to raise interest rates.
A massive corruption scandal at state-run oil company Petrobras has also damaged investor sentiment, along with a growing political crisis which included calls for Rousseff's impeachment.
Loss of the investment-grade rating would boost financing costs for Brazil's government and companies.
It also would hurt dollar inflows to the country since many investors are barred from buying junk-rated securities.
S&P was the first of the Big Three ratings agencies to raise questions about Brazil's investment grade.
Both Moody's Investors Service and Fitch Ratings have the country at BBB, two notches above junk, with a negative outlook.
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