S&P cuts outlook on Brazil sovereign rating
probability that a rising government debt burden and erosion of macroeconomic stability could lead to a downgrade of Brazil over the next two years,” the agency said.
By Joe Leahy in São Paulo
Standard & Poor’s late on Thursday lowered the outlook on Brazil’s sovereign rating in a warning for a country that until recently has been a rising star of credit rating agencies.
S&P said slow economic growth, expansionary fiscal policy that was likely to lead to an increase in the government’s debt burden, and “ambiguous policy signals” in decision-making were among the factors behind the surprise move.
“The negative outlook reflects the at least one-in-three probability that a rising government debt burden and erosion of macroeconomic stability could lead to a downgrade of Brazil over the next two years,” the agency said.
Brazil’s finance ministry was not immediately available for comment.
S&P’s move comes amid increasing signs of concern in President Dilma Rousseff’s government over the effects of a mixture of slowing growth, high inflation and a depreciation of the country’s currency, the real, against the dollar in recent days.
In an apparent attempt to reassure markets that the government was still committed to targeting inflation – one of the hallmarks of Brazil’s economic stability in the past 15 years – the central bank last week increased the benchmark interest rate by a sharper than expected 50 basis points, even after first-quarter economic growth missed forecasts.
This week, in another surprise move, it lowered to zero a financial transactions tax on foreign investment in the domestic fixed income market that was highly unpopular with overseas investors when it was introduced in 2010 to stem strong capital inflows.
S&P said it affirmed its “BBB” long-term and “A-2” short-term foreign currency sovereign credit ratings on Brazil but that these now faced question marks from the negative outlook.
It said Brazil was likely to have its third year of “modest” economic growth at 2.5 per cent in 2013, compared with 0.9 per cent last year and 2.7 per cent in 2011.
“The weak growth reflects modest export performance as well as declining private sector investment, partly because of ambiguous policy signals from the government that have dampened investor confidence,” S&P credit analyst Sebastian Briozzo said.
Brazil shocked foreign investors last year after it gave electricity companies an ultimatum of lowering tariffs or risking losing their concessions when they came up for renewal.
The government has also introduced measures to subsidise industry and consumers and protect domestic manufacturers, that critics say have contributed to confusion over policy direction.
“Continued slow economic growth, weaker fiscal and external fundamentals, and some loss in the credibility of economic policy given ambiguous policy signals could diminish Brazil’s ability to manage an external shock,” said S&P, warning that it also expected a rise in net public debt in the next three years.
Inflation is an emotive issue in Brazil. São Paulo’s main thoroughfare, Avenida Paulista, was paralysed by clashes between police and hundreds of demonstrators on Thursday night protesting over rises in bus ticket prices.
Brazilian officials said the country remained on a solid footing with a strong banking system, a government committed to economic stability and with some of the largest foreign reserves in the world.
The government has also argued that first-quarter GDP growth showed a rebound in much-needed investment, and points to a recent reform package to reinvigorate ports, as well as infrastructure packages for road, rail and airports.
Ms Rousseff has also rejected suggestions of ad hoc policy making, saying the electricity tariffs were lowered according to companies’ contracts.
S&P said it could revise the outlook back to stable if there were “more consistent policy initiatives that generate greater private sector confidence and, thus, higher investment”.
“The resulting boost in the country’s trend rate of GDP growth would give the government more fiscal and monetary flexibility,” it said.
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