S&P downgrades Brazil to ‘junk’ status

After warning Brazil two months ago about a rate cut, Standard & Poor’s downgrades south American country’s rating to “junk”, much lower than its “investment-grade” status given by rating agency in 2008

Photo by: AP
Photo by: AP

Products on sale are displayed in a clothing store in Sao Paulo, Brazil, March 27, 2015

Standard & Poor's downgraded Brazil's credit rating to junk grade on Wednesday, further hampering President Dilma Rousseff's efforts to regain investors' trust and pull Latin America's largest economy out of recession.

The faster-than-anticipated downgrade from investment grade will likely rock Brazilian financial markets on Thursday and will increase borrowing costs for the government and Brazilian companies.

Brazil first won its investment-grade credit rating in 2008 and the S&P downgrade is a major setback for Rousseff, a leftist struggling to kick-start the economy and shore up weak public finances.

It further sours market sentiment about the country and Brazilian assets will suffer because many investors will perceive higher risks.

S&P cut Brazil's rating to BB-plus, the highest junk rating, from BBB-minus.

It warned less than two months ago that a downgrade was possible but the unusually fast move underscores how quickly Brazil's economy and public finances have deteriorated since then. The outlook on the new rating remains negative, which means additional downgrades are possible in the near term.

The investment-grade rating was a key imprimatur that solidified Brazil's emergence as an economic power during a decade-long commodities boom that fizzled in recent years as the Chinese economy, Brazil's biggest export market and once ravenous for its raw materials, began slowing.

Fitch Ratings currently rates Brazil at BBB, two notches above investment grade, with a negative outlook. Moody's Investors Service downgraded Brazil less than a month ago to the brink of junk, but said its investment grade was safe for now.

S&P said on Wednesday its decision was based on the mounting political problems that have muddled economic policy.

The economy has also been weighed down by a massive corruption scandal at state-run oil firm Petroleo Brasileiro SA , freezing many infrastructure investments.

Brazil's currency, the real, has lost a third of its value this year and the inflation rate has jumped to almost 10 percent.

The economic crises and the corruption scandal have both battered Rousseff's approval ratings, which are now in single digits, fuelling opposition calls for her resignation or impeachment.