Ongoing political turmoil, a scandal that has hit its huge oil company Petróleo Brasileiro S.A. (NYSE: PBR) and a tattered gross domestic product have caught up to Brazil, at least in the eyes of Standard & Poor’s. The rating agency downgraded the sovereign debt of the nation to BB+/B; Outlook Is Negative, just as powerful forces are in the midst of trying to replace President Dilma Rousseff. It is another nail in the coffin of the BRIC nations (Brazil, Russia, India and China), which were supposed to be the engine of the global economy in the 21st century.
The falling price of crude has not helped.
The rating agency’s researcher wrote:
We believe Brazil’s credit profile has weakened further since July 28, when we revised the outlook on Brazil to negative. At that time, we signaled increased execution risks to the corrective policy changes already underway, mainly stemming from fluid political dynamics in Congress associated with spillover effects from investigations of corruption at state-owned energy company Petrobras. We now perceive less conviction within the president’s cabinet on fiscal policy.
Brazil’s 2016 budget proposal tabled on Aug. 31 incorporated yet another revision to the government’s fiscal targets in a short period of time. The proposed budget is based on a primary deficit of 0.3% of GDP, rather than the previously revised 0.7% of GDP surplus target that was announced in July. This change reflects internal disagreement about the composition and magnitude of measures needed to redress the slippage in public finances.
And matters could get worse, according to S&P:
The negative outlook reflects our view that there is a greater than one–in–three likelihood that we could lower our ratings on Brazil again. We anticiapte [sic] that within the next year a downgrade could stem in particular from a further deterioration of Brazil’s fiscal position, or from potential key policy reversals given the fluid political dynamics, including a further lack of cohesion within the cabinet. A downgrade could also result from greater economic turmoil than we currently expect either due to governability issues or the weakened external environment.
The primary solutions to this may be the removal of Rousseff, and the recovery of oil prices to a level above $50 a barrel. Otherwise, Brazil is in for a long, hard road.
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