Fitch Ratings on Thursday cut Brazil's credit rating to the brink of junk, warning the country could soon lose its coveted investment grade rating as government finances deteriorate amid a prolonged recession and persistent political uncertainty. Fitch cut Brazil's rating to BBB-minus from BBB. It left a negative outlook on the new rating, suggesting another downgrade is possible over the next year or so. A further downgrade by Fitch would mean two major ratings agencies placing Brazilian debt in junk territory.
"The negative outlook reflects Fitch's view that economic and fiscal underperformance is likely to persist while political uncertainty could continue weighing on broader confidence," Fitch said in a statement. The uncertainty, Fitch added, would "delay a turnaround in investment and growth."
The Brazilian real erased early gains and dropped about 1 percent following the downgrade, which potentially increases debt costs for the country and Brazilian companies. Fitch's decision comes little more than a month after Standard & Poor's stripped Brazil of its investment-grade rating, saying mounting political problems have muddled economic policy in Brazil.
A second downgrade to junk could have an even greater market impact than the first one as many investors are prevented from holding bonds that are not rated investment grade by at least two ratings firms. Fitch was widely expected to downgrade Brazil by at least one notch to better align its rating to those issued by competing ratings firms. On August 11, Moody's Investors Service downgraded the country to its lowest investment grade rating with a stable outlook.