Brazil cut to junk

Getty/ Laurence Griffiths

Ratings agency Standard and Poor’s this morning cut Brazil’s sovereign credit rating one notch from BBB+ to BB-, leaving the nation’s debt categorised as non-investment grade, or “junk” status.

The agency also left the rating on “watch negative”, meaning there may be potential downgrades to come dues to the nation’s deteriorating fiscal outlook.

Here’s Standard and Poor’s on the decision:

“The political challenges Brazil faces have continued to mount, weighing on the government’s ability and willingness to submit a 2016 budget to Congress consistent with the significant policy correction signaled during the first part of President Dilma Rousseff’s second term.

The government’s 2016 budget proposal envisions yet another change to the primary fiscal target less than six weeks after the previous downward revision, which would mean three consecutive years of a primary deficit and net general debt continuing to rise if subsequent revenue or expenditure measures are not taken.

The negative outlook reflects what we believe is a greater than one–in–three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position, potential key policy reversals given the fluid political dynamics, including a further lack of cohesion within the president’s cabinet, or due to greater economic turmoil than we currently expect”.

Brazil’s government said in August it forecasts a fiscal deficit in 2016 of 30.5 billion reais ($7.9 billion), or about 0.5% of gross domestic product. That compares with a targeted surplus of 2% at the beginning of this year and a revised objective of 0.7% announced in July. The country’s gross debt as a percentage of its economy climbed to 65% in July from 51% at the end of 2011, according to a report from Bloomberg.

Even before today’s ratings action from the agency, Brazilian financial markets have endured a torrid period in 2015. The Brazilian real is the worst performing emerging markets currency this year, tumbling over 30% against the US dollar, while the nation’s stock market, the Ibovespa, has fallen by an even larger 35%.

Speaking to Bloomberg, Daniel Weeks, chief economist at Garde Asset Management in Sao Paulo, suggests the malaise the country currently finds itself in may be hard to reverse.

“The downgrade could be a wakeup call but the political situation is so bad that it’s difficult to resolve, so it’s a dark path ahead”, he said, adding “markets will take this as a negative, and it will probably drag down emerging markets at a global level”.

You can read more here.

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