Fitch says next few months key to decision on Brazil rating

The country kept investment grade status, but it is only a step away from losing it. Standard & Poor’s stripped Brazil of its investment-grade credit rating in September. The main risk factors that could, individually or collectively, trigger negative rating action are: -A severe negative growth shock that damages the country’s economic and fiscal stability.

In the course of the year, two other major rating agencies, Fitch and Moody’s, have sequentially downgraded Russia’s credit rating to junk or near-junk status. Earlier Thursday, before the downgrade was announced, Rafael Guedes, director of Fitch Ratings in Brazil, said a negative outlook means there is a 50% chance of a downgrade to the country’s rating in the next few years.

Fitch said the improvement in the government’s revenue “may be sustained into FY16” but volatility in the dairy sector, which produces New Zealand’s largest export commodity, would be “an important determinant of revenue growth”.

“Although Brazil’s downward rating trajectory is likely well anticipated by markets by now, the continued negative outlook by Fitch following today’s rating action may still have come as a surprise, given the conservative approach the agency has held thus far towards the sovereign rating”, says Barclays. Fitch estimates the deficit in 2015 to remain at just under 2% of GDP, as government spending rises to partially match the disbursement of European Union structural funds.

She needs legislative approval for most of her proposed belt-tightening measures but faces a political scenario complicated by calls for her impeachment, in part due to a massive contract-rigging and kickback scandal centered on state-controlled oil giant Petrobras, a company she chaired from 2003 to 2010.