Major rating agencies are chasing each other in downgrading Brazil, as the country struggles with recession, a spiraling devaluation of the real and a damaging political crisis.
Amid “a poisoned cocktail of bad news”, international investors are fleeing the country and betting against its currency, as hefty growth rates are long gone.
“There is a very poisoned cocktail of bad news for Brazil,” says Bernd Berg, director of emerging markets at Societe Generale in London, who expects to see the real-to-US dollar ratio soon hit four to one. The Brazilian currency has lost more than 25% of its value since the start of 2015, despite central bank intervention.
President Dilma Rousseff of the Workers’ Party is trying to weather a crisis of confidence in her government. The crisis stems from economic distress and a major corruption scandal involving state-owned oil giant Petrobras.
Standard & Poor’s rates Brazil at BBB-, only a step above junk, and it has revised its outlook to negative, suggesting a possible cut in the next 12 months.
Moody’s in August downgraded Brazil to Baa3 from Baa2. But in a rare sign of confidence for the struggling nation, it raised its outlook to stable from negative, saying it thinks Brazil possesses the ability to achieve a turnaround in growth and fiscal performance.
But Fitch, which currently rates Brazil a BBB, has a negative outlook on the country.
“It’s difficult to be precise on how much time it could take for Brazil to lose its investment-grade status,” says Bruno Rovai, economist at Barclays. “It is difficult to separate the political crisis from expectation of a downgrade.”
US-educated Finance minister Joaquim Levy disappointed markets in July when he reneged on his targets of reaching a primary budget surplus of 1.1% of GDP in 2015 and 2% in 2016. The announcement triggered a sell-off of Brazilian assets on international markets. “You have a government with no capacity whatsoever for any political coordination,” notes Rovai.
The large outflow of capital that pushed the real down has been caused by unwinding of carry trades and by investors’ shortening positions amid predictions of further economic decline.
“Our panelists are now predicting a 1.6% contraction in GDP, which will likely be the country’s worst recession in 25 years,” said Consensus Economics in a July report.