Standard & Poor’s cut Brazil’s sovereign credit rating to junk on Sept.9, citing the struggle by President Dilma Rousseff’s government to master growing debt and political turmoil.
“We are lowering the long-term foreign and local currency ratings on Brazil to ‘BB+’ and ‘BBB-‘ respectively,” the agency said in a statement.
The junk rating is a blow to Brazil’s foundering economy because it could drive off investors just when Rousseff and her finance minister, Joaquim Levy, are battling to balance the books.
Analyst Andre Leite at TAG Investimento noted that Brazilnow finds itself rated lower than Russia, which is under painful international sanctions over its support for separatists in neighboring Ukraine.
“If another rating agency also lowers Brazil, then very probably we’re going to see institutional investors obliged to pull their money out,” Leite said.
Last month Levy, who has tried to steer Brazil to health with austerity measures, presented the country’s first ever deficit budget for 2016 and he is now under pressure to raise taxes despite heavy opposition in Congress.
The government also announced in August that the economy was officially in recession and that the contraction could extend through 2016, becoming the longest recession since 1931.
“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 economic targets, Standard & Poor’s said.
“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,” the agency said in its statement.
Other risks in Brazil include “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.”
Planning Minister Nelson Barbosa said the downgrade was a “surprise” but not insurmountable.
“This news is not good but it can be reversed and we are working to do so. The Brazilian government has all the tools to resolve the country’s fiscal issue,” he said.
Standard & Poor’s reasoning reads like an investor horror show, starting with “spillover effects” from the still-unfolding corruption scandal centered on state-owned oil giant Petrobras.
Petrobras lost $2.1 billion in a scheme where top Brazilian executives and politicians are said to have robbed the company by cooking up inflated construction contracts in exchange for bribes.
That scandal, which continues to grow, has badly hurt investor confidence and contributed to rock-bottom approval ratings for Rousseff, with some in Congress pushing for her impeachment.
Rousseff has not been accused, but she chaired the board at Petrobras between 2003 and 2010, when much of the alleged corruption was flourishing.
As her political stock dwindles, Rousseff has found it harder to push unpopular reforms that had been hoped would bring order to an economy suffering badly from the worldwide drop in commodities prices.
Last week, markets were shaken by rumors — later denied — that Levy was resigning.
Standard & Poor’s said the political situation did not augur well.
“The series of events leading to the budget proposal suggests to us diminished cohesion within President Rousseff’s cabinet and contributes to our assessment of a weaker credit profile.”
“Ongoing investigations of corruption allegations against high-profile individuals and companies… have led to increased near-term political uncertainty,” the ratings agency said.
Brazil saw boom years peaking with 7.5 percent economic growth in 2010. But analysts say Latin America’s biggest country — the host of next year’s Summer Olympics — now faces a prolonged downturn.