BRASILIA (Reuters) - Standard & Poor’s downgraded Brazil’s credit rating deeper into junk territory on Wednesday, citing its failure to curb its fiscal deficit, in a surprise blow to President Dilma Rousseff`s bid to haul the economy out of its worst recession in decades.
S&P cut Brazil’s sovereign credit rating to BB from BB+ with a negative outlook, just five months after becoming the first agency to strip the country of its coveted investment grade. Fitch ratings followed suit in December.
Standard & Poor’s highlighted the government’s inability to plug the widening fiscal deficit amid a deepening political and economic crisis. Brazil’s economy, the largest in Latin America, is on track for its worst recession since records began in 1901, after contracting around 4 percent last year.
“We now expect a more prolonged adjustment process with a slower correction in fiscal policy, as well as another year of steep economic contraction,” S&P said in a statement.
Brazil’s budget deficit has mushroomed since Rousseff took office in 2011. The deficit equalled 10.3 percent of gross domestic product in 2015, nearly five times its shortfall in the 12 months to mid-2011.
By comparison, at the height of its debt crisis in 2009 Greece had a deficit of 15.2 percent of GDP.
The downgrade caught Brazilian officials by surprise. Once the rising star among major emerging economies, Brazil now shares the same rating of its much poorer neighbours Paraguay and Bolivia.
“We were considering this possibility, but we didn’t think it would come so quickly,” said a presidential aide who was not authorized to speak publicly on the matter.
Another government official said the surprise move could prompt the administration to announce a series of fiscal measures as soon as Friday.
The government is working on legislation to reduce its fiscal goal for 2016 as revenues plummet. The government is also considering a budget freeze of around 24 billion reais ($6.02 billion), down sharply from the near 70 billion reais in 2015, the official told Reuters.
In an official statement, the finance ministry said it was confident the downgrade will be reversed as soon as measures to rebalance the public accounts and bolster growth start to take hold.
Brazil’s benchmark Bovespa stock index and its currency gave back some of the day’s gains immediately after the decision.
The downgrade could exert further downward pressure on the real currency and prompt investors to exit an economy that only four years ago was growing above 4 percent, and raise borrowing costs for the government and corporations. The real currency lost more than 30 percent of its value last year.
“This is unlikely to be the last downgrade because of the secular downward trend in emerging market credit ratings,” said Alejo Czerwonko, emerging markets strategist at UBS Wealth Management, pointing to today’s downgrade of Saudi Arabia, Oman, Bahrain and Kazakhstan.
“If policymakers have not reacted to previous downgrades why would they react to this marginal change in rating.”
Barclays said it expects S&P to downgrade Brazil again by the end of the year as political turmoil is likely to continue. Moody’s and Fitch could downgrade the country in the first half of the year, Barclays said in the research note.
The downgrade highlights the challenges that Rousseff faces amid growing pressure from allies to relax an austerity drive and stimulate economic growth to survive ongoing impeachment proceedings.
Markets now expect the Brazilian economy to shrink more than 3 percent this year, fuelling unemployment. More than 1.5 million Brazilians lost their jobs last year, helping to crush Rousseff’s approval ratings.
Additional reporting by Bruno Federowski and Silvio Cascione; Writing by Alonso Soto and Daniel Flynn; Editing by Chizu Nomiyama, Bernard Orr