Standard & Poor cuts Brazil's loan rating, citing political turmoil

By Staff Writer

Feb 18, 2016 11:16 AM EST

Standard & Poor has trimmed Brazil's loan rating into "junk territory' following the nation's failure to reduce its fiscal risks and the political hurdles facing the economy of Brazil. The rating agency reduced Brazil's rating to BB with a negative forecast.

The new reduced level puts the Latin American country in line with nations like Guatemala, Paraguay and Bolivia. The agency also cut Petroleo Brasileiro SA, an oil firm in Brazil, to B+, which is four steps down the investment grade, Bloomberg quoted a report from the rating agency.

Brazil drained revenue from exports of soybeans, iron ore and oil amid the worst recession in the nation and flagging economy in China, Brazil's major partner in trading. The nation's currency, real, made the poorest performance in the currency market in 2015 by sinking nearly 30% as the nation missed its "investment-grade rating".

According to Standard & Poor, Brazil is facing serious problems in the economic and political arena and that the agency expects slower alteration in the nation's fiscal strategy and a prolonged year of economic slowdown. In December, Fitch reduced Brazil's rating into "junk territory" and Moody's Investors Service placed Brazil in the low level of the investment grade.

A director at Natixis North America, Juan Carlos Rodado said that other agencies are yet to join the rating campaign and the only way for the country to escape low rating is to bring political reform. Failure of Dilma Rousseff's election pledge to pull the nation's economy out of the horrible recession in over decades nailed the country's effort to lower its fiscal risks. Dilma Rousseff is facing the efforts of impeachment for her accountability in the nation's capitals. However, the rating agency expect the political factors to limit the capability of fiscal reforms.

The government of Brazil is working to cut its 2016 fiscal target following a fall in revenues. The country is also aiming to freeze its budget of nearly $6.02 billion, Reuters quoted an official statement. The poor rating could apply more downward pressure on the nation's currency and also motivate investors to quit the economy.

The nation is still hopeful that the lower rating will be inverted as the government take steps to make necessary adjustments to its fiscal strategy. Brazil's Bovespa and the real lost their gains following the agency's decision.

THE WALL STREET JOURNAL quoted Silvio Campos Neto, an economic expert at Sao Paulo, who said that Moody's Investors Service gives the nation an investment-grade rating and that a lower rating is expected very soon from the unique holdout. The country's 2015 budget scarcity hit as much as 10.3% of GDP.

The government is working hard to reduce its budget scarcity and it is hopeful to reform its fiscal strategy amid political challenges and economic slowdown. The global market is closely monitoring the reform activities in Brazil's political and economic arena.

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