S&P downgrades Brazil to junk status

S&P Ratings Services has downgraded Brazil to junk bond status, as the Petrobras scandal has impacted the government’s ability to govern.

The ratings service has now ranked Brazil’s long-term foreign and local currency sovereign ratings BB+ and BBB- respectively, amid concerns about the country’s government.

S&P said the “political challenges Brazil faces have continued to mount” while the 2016 budget proposals saw another change to deficit expectations.

The budget proposal saw GDP expectations for a primary deficit of 0.3 per cent of GDP rather than the previously revised 0.7 per cent of GDP surplus target annouced a month earlier.

The country has also suffered from the investigations into corruption at state-owned energy company Petrobras, which S&P says has created friction in the coalition government.

“Stressed coalition dynamics between the Workers’ Party and the Brazilian Democratic Movement Party augur poorly for approval of needed fiscal adjustment measures, even with a relaxed fiscal target, in our view,” says the S&P analysis.

“We believe Brazil’s credit profile has weakened further since July 28, when we revised the outlook on Brazil to negative,” says S&P.

“At that time, we signaled increased execution risks to the corrective policy changes already underway, mainly stemming from fluid political dynamics in Congress associated with spillover effects from investigations of corruption at state-owned energy company Petrobras. We now perceive less conviction within the president’s cabinet on fiscal policy,” the note says.

S&P says there is a greater than one in three chance of a further downgrade on Brazil. 

“We anticiapte that within the next year a downgrade could stem in particular from a further deterioration of Brazil’s fiscal position, or from potential key policy reversals given the fluid political dynamics, including a further lack of cohesion within the cabinet,” says S&P.