Moody’s Investors Service lowered Brazil’s rating to the cusp of junk in the second downgrade since President Dilma Rousseff came to office. Stocks and the real pared losses as it signaled another cut isn’t likely soon.
Brazil’s grade was cut by one notch to Baa3, with a stable outlook. Standard & Poor’s cut its rating to the lowest investment grade in March 2014, the nation’s first downgrade in a decade.
The move adds pressure to Rousseff’s economic team, led by Finance Minister Joaquim Levy, who has reduced spending and raised taxes to shore up fiscal accounts. With Brazil’s economy heading for its worst contraction in a quarter century, government revenue is falling more than expected.
“Weaker-than expected economic performance, the related upward trend in government expenditures and lack of political consensus on fiscal reforms will prevent the authorities from achieving primary surpluses high enough to arrest and reverse the rising debt trend this year and next,” Moody’s said in a statement Tuesday.
Brazil is rated BBB- by S&P, which on July 28 changed the outlook to negative, indicating that a downgrade is more likely than an upgrade. Fitch Ratings rates Brazil at BBB, two steps above junk, with a negative outlook.
Brazil’s Ibovespa index pared losses and the real rebounded as the market took solace in the stable perspective, said Jefferson Rugik, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil.
“The stable outlook comes as a certain relief for this government and the finance ministry,” he said in an telephone interview. “It gives them some time to recover.”
Brazil’s real fell 1.1 percent to 3.4767 per U.S. dollar as of 5:35 p.m. in Sao Paulo, after earlier weakening as much as 2.3 percent. The benchmark Ibovespa index trimmed losses to 0.6 percent at the close of trading.
Latin America’s biggest economy is poised to contract 1.5 percent this year, putting it on track for its deepest recession since 1990, according to the average of 31 economist estimates compiled by Bloomberg. Even as growth stalls, above target inflation continues to accelerate, eating into wages and pushing Rousseff’s approval rating to record lows.
In an Aug. 4-5 poll by Datafolha, 66 percent of respondents say Congress should open impeachment proceedings. Her approval rating fell to a record low 8 percent in the poll, and 71 percent said her presidency has been bad or terrible.
Rousseff’s popularity is also facing pressure amid a widening corruption probe into an alleged cartel formed by builders to win contracts at state-run oil producer Petroleo Brasileiro SA in exchange for kickbacks.
The country’s currency is the worst performer among 31 major tenders so far this year amid anticipation by investors that Brazil could have its rating lowered and because of woes regarding fiscal accounts.
In an attempt to avoid a cut to junk, Rousseff has won passage of three key bills in Congress this year to raise taxes and limit expenditures on worker benefits. The effort is part of Levy’s strategy to shrink the budget deficit and rebuild investor confidence.
© Copyright 2023 Bloomberg News. All rights reserved.