Brazil Credit Rating Not Downgraded but Outlook Negative

By Lisa Flueckiger, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – Against widespread expectations from financial experts, rating agency Standard & Poor’s has decided not to downgrade Brazil’s credit rating yet. The country’s current rating status of BBB- is still within investment grade and will be maintained, while the agency changed the outlook to negative.

Changing the outlook of Brazil to negative means that the agency expects the economic recovery to take longer than anticipated, but the country was let off with a warning regarding its valued investment grade rating in foreign currency, which is just one notch above junk status.

“To set a negative outlook, this was no news for me,” Marcos Casarin, economist with consultants Oxford Economics told the Financial Times. “It was already part of my baseline that Brazil would be rated junk again.”

While Standard & Poor’s recognized “a significant correction of policy during the second term of President Dilma Rousseff” in their statement, they also found that “Brazil faces challenging political and economic circumstances.” These had worsened since their last evaluation of the country in March.

The investigations into the large scale corruption scandal, which also include many politicians and businessmen, was a large factor in changing the country’s outlook to negative, as the implementations of measures against the current economic downturn are hindered by the scandal, especially in Congress.

One part is Speaker of the House of Representatives Eduardo Cunha, who officially broke with the government of President Dilma Rousseff last week, even though his PMDB party is part of the government coalition. The announcement came after Cunha himself had been cited as involved in the Lava Jato scandal. Another is the country’s heavy debt, which stands at 62.5 percent of GDP.

“We revised our outlook for Brazil to negative to reflect what we believe is a greater chance than one in three that corrections in policies will, in the future, see further slippage due to the volatile dynamics in politics, and the return to a growth trajectory will take longer than expected,” S&P’s statement read.

Fellow rating agency Moody’s rates Brazil Baa2, two notches above junk, while Fitch keeps Brazil on an equivalent BBB rating. However, Fitch also lowered its outlook from “stable” to “negative” this year and economists expect downgrades from the agencies to one step above junk status soon while maintaining a negative outlook, according to the Financial Times.