FXStreet (Córdoba) – The rating agency Fitch downgraded Brazil bond rating below the investment grade and left the outlook negative. The downgrade was of one notch but with great importance, because it put the county below the investment grade (IG), to BBB- to BB+.

Standard and Poor¡s downgraded Brazil rating in September below IG while Moody’s (the last of the big three that still has it above IG) warned last week that it put rate under review for a potential downgrade.

The Brazilian real is among the worst performers in the currency market. USD/BRL rises more than 2% and trades at 3.95 while the Bovespa Index falls 0.85%. Today’s downgrade of the another agency could force some institutional selling of Brazilian assets but according to market expectations it was a matter of time.

Key Quotes:

Brazil’s downgrade reflects the economy’s deeper recession than previously anticipated, continued adverse fiscal developments and the increased political uncertainty that could further undermine the government’s capacity to effectively implement fiscal measures to stabilize the growing debt burden.”

“The Negative Outlook highlights continued uncertainty and downside risks related to economic, fiscal and political developments. The deteriorating domestic backdrop is increasing challenges for the authorities to take timely corrective policy actions to support confidence and improve prospects for growth, fiscal consolidation and debt stabilization.”

Increased unemployment rates, constrained credit, depressed confidence and high inflation are weighing on consumption while political and policy uncertainties, the construction sector malaise and negative spill overs from the Petrobras corruption investigations and capex cuts have hurt investment. The external environment remains difficult for Brazil with the slide in commodity prices, China’s slowdown and tightening international financial conditions.”

“Fiscal deterioration continues against the backdrop of weaker economic conditions.”

“Consequently, Fitch’s baseline fiscal projections have deteriorated, with the agency forecasting the general government fiscal deficit to reach over 10% of GDP in 2015 and remain elevated, averaging over 7% of GDP during 2016-2017.”

“The recent start of impeachment proceedings against President Rousseff is adding uncertainty to an already difficult political environment and leading to continued political stalemate.”

“The reduction in some macro imbalances is continuing. The economic slump and BRL depreciation have facilitated a 36% reduction in the current account deficit in nominal USD terms during January-October compared to the same period of last year. Further reduction in the current account deficit is expected during the forecast period, which could mitigate risks related to potential tighter external financing conditions. On the other hand, inflation remains high at 10.5%, and inflation expectations, after inching downwards have reversed course and have begun to increase for 2016 and 2017, remaining above the 4.5% inflation target.”

Brazil’s ‘BB+’ ratings are supported by its economic diversity and entrenched civil institutions, with its per capita income and governance indicators better than the ‘BB’ median. The country’s shock absorption capacity is boosted by its flexible exchange rate, robust international reserves, a strong net sovereign external creditor position, deep and developed domestic government debt capital markets, and an adequately capitalized banking system. The share of foreign currency debt in total general government debt remains low and prudent liability management has reduced interest rate and refinancing risks.”

In addition, the government has shown some capacity to respond in difficult conditions by implementing relative price adjustments, tightening monetary policy amidst a deepening recession and reining in quasi-fiscal stimulus.”

The rating agency Fitch downgraded Brazil bond rating below the investment grade and left the outlook negative. The downgrade was of one notch but with great importance, because it put the county below the investment grade (IG), to BBB- to BB+.

(Market News Provided by FXstreet)

By FXOpen