S&P Cuts Brazil Outlook to Negative on Sluggish Growth
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Credit ratings agency Standard and Poor’s cut Latin America’s largest economy’s outlook from stable to negative on Thursday, citing slugging economic growth and an expansionary fiscal policy that could lead to an increase in the government’s overall debt levels.
Credit ratings agency Standard and Poor’s cut Latin America’s largest economy’s outlook from stable to negative on Thursday, citing slugging economic growth and an expansionary fiscal policy that could lead to an increase in the government’s overall debt levels.
Although not an outright downgrade, S&P said it could “lower the credit rating in the coming two years if continued sluggish economic growth, weaker fiscal and external fundamentals, and some loss in the credibility of economic policy given ambiguous policy signals diminish Brazil’s ability to manage an external shock.”
The ratings firm added that Brazil is likely to suffer its third year of weak growth, with GDP expected to increase only 2.5 percent this year after growing 2.7 percent in 2011 and 0.9 percent in 2012.
S&P credit analyst Sebastian Briozzo, said “the weak growth reflects modest export performance as well as declining private-sector investment, partly because of ambiguous policy signals from the government that have dampened investor confidence.”
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The pessimistic outlook, which threatens to end a decade-long stretch of rating upgrades for Latin America’s largest economy, is the latest blow to Brazil which has seen its currency battered and economic growth weaken as investors lose faith in what just two years ago was considered an overwhelming success story.
Brazilian officials were however quick to downplay the S&P decision, arguing that it has a strong banking system and a government committed to economic stability and with some of the largest foreign reserves in the world.
Officials also pointed to the country’s falling debt-to-GDP ratio and argued that Q1 GDP numbers showed a much-needed rebound in private investment levels. “We are on a growth trajectory, with growth in private investment. We’re also regaining the confidence of economic agents,” said the Finance Ministry’s Economic Policy Secretary Marcio Holland.
The government has in recent months tried to kick-start the economy by passing tax cuts and getting the private sector more involved in the construction of highways and airports, though several of those measures have yet to bear fruit.
On Tuesday, Brazil cut the financial transactions tax on overseas investments in domestic bonds from 6 percent to zero, a surprise move that could help stop a sharp depreciation of the real that threatens to stoke already high inflation in the country.
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S&P said it could revise the outlook back to stable if there were “more consistent policy initiatives that generate greater private sector confidence and, thus, higher investment”.
“The resulting boost in the country’s trend rate of GDP growth would give the government more fiscal and monetary flexibility,” it said.
