Brazil stripped of investment grade rating as crisis deepens

By Filipe Pacheco & Paula Sambo Brazil’s credit rating was cut to junk by Fitch Ratings, which became the second major ratings company to strip the country of its investment grade as Latin America’s largest economy heads to its longest recession since the Great Depression amid political turmoil. With the number now two, many institutional types will find themselves forced to exit Brazilian exposure. “Brazil’s economic slump is not abating”.

Fitch downgraded Brazil to BB+ with a negative outlook, underscoring its concerns about a widening fiscal deficit that the leftist president has struggled to close as tax revenue fell in the sharpest economic downturn of the last quarter century.

Mr Levy tried to sound upbeat after Fitch’s downgrade, saying he is “confident in the Brazilian economy’s capacity to resume a cycle of growth”.

The weaker starting point of fiscal accounts, deeper-than- previously projected economic contraction in 2016 and increased political uncertainty in recent weeks cast further doubt on the ability of the government to secure timely legislative approval to meet its primary surplus target for 2016.

Investors barred from owning junk bonds could dispose of about $20 billion in Brazilian sovereign and corporate debt after two agencies downgraded Brazil, analysts at JPMorgan Securities estimated in October. Moreover, the passage of measures to structurally improve the outlook for public finances and enhance the credibility of medium term fiscal consolidation appears hard in the current political environment.

Standard & Poor’s cut Brazil’s debt to junk status in August, meaning only Moody’s has kept the globe’s seventh-largest economy at investment grade.

Levy told journalists in Brasilia on Wednesday that he felt “obfuscated” by Rousseff’s decision, labelled Fitch’s downgrade as “serious” and did not respond to questions about whether he was staying on the job.

Fitch’s move comes a day after Rousseff sent to Congress a proposal to reduce a key fiscal target for next year – a blow to those arguing that the nation needs strong austerity measures to pull itself out of recession. Brazil’s inflation rate has hovered around ten-year highs recently while the currency, the Brazilian real, has passed ten-year lows when measured against the USA dollar. The iShares MSCI Emerging Market ETF (EEM) is up 1.5% this morning, but Brazil banks Itau Unibanco Holding (ITUB) and Banco Bradesco (BBD) are each down about 5%, while Banco do Brasil (BDORY) is down 6%.

Fitch had already downgraded Brazil once this year, highlighting the country’s recession-hit economy.