Bloomberg News

Brazilian Real’s Rout Deepens as S&P Cuts Credit Rating Outlook

June 07, 2013

Brazil’s real fell to a four-year low after Standard & Poor’s (SPY:US) cut the government’s credit-rating outlook to negative amid an economic slump that’s threatening to drive up the country’s debt levels.

The real sank 0.8 percent to 2.1467 per dollar at 10:23 a.m. in Sao Paulo after earlier reaching 2.1533, the lowest on a closing basis since May 2009. Swap rates due January 2016 rose 11 basis points, or 0.11 percentage point, to 9.79 percent. The Ibovespa benchmark stock gauge slumped 0.5 percent

S&P lowered yesterday the outlook from stable on Brazil’s BBB rating, which is two levels above junk and in line with Mexico’s and Russia’s, saying it was concerned by the country’s sluggish economic growth, weakening fiscal accounts and loss of credibility with investors. The rating company also cut the outlooks for state-controlled oil company Petroleo Brasileiro SA (PETR3) and government-run utility Centrais Eletricas Brasileiras SA. (ELET3)

“It has to do with policy inconsistency, the low-growth high-inflation trade off, and the loss of credibility of the central bank,” Siobhan Morden, a fixed-income strategist at Jefferies Group LLC, said in a phone interview from New York.

The move threatens to end a decade-long stretch of rating upgrades for Latin America’s biggest country. Yields on Brazil’s dollar bonds have surged an average 0.81 percentage point in the past month to 4.49 percent. Morden said the outlook revision may trigger more declines in Brazilian debt.

‘Ambiguous Policy’

“We 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,” S&P said in the report.

Brazil’s economy expanded 0.9 percent last year and is forecast to grow 2.77 percent in 2013, according to a central bank survey published June 3. Quickening inflation has prompted policy makers to boost interest rates by 0.75 percentage point this year after they lowered borrowing costs by 5.25 percentage points in cuts that began in August 2011.

The annual inflation rate rose to 6.5 percent in May, matching the upper end of policy makers’ target range, from 6.49 percent in April, a government report showed today.

Lackluster growth is leading to deterioration in the fiscal outlook and a rising government debt burden that may lead to a downgrade in the next two years, S&P analyst Sebastian Briozzo said in an e-mailed statement. There’s at least a one in three chance of a rating cut, S&P said.

Three-Month Plunge

“Continued slow economic growth, weaker fiscal and external fundamentals, and some loss in the credibility of economic policy given ambiguous policy signals could diminish Brazil’s ability to manage an external shock,” Briozzo wrote.

The real has fallen 8.9 percent in three months, the biggest drop among 16 major currencies tracked by Bloomberg, as rising U.S. bond yields drew capital away from Brazil. The government removed a tax on foreigners’ bond purchases this week in a bid to lure investment.

S&P last upgraded Brazil in November 2011. The country is rated BBB by Fitch Ratings and an equivalent Baa2 by Moody’s, which has a positive outlook on the grade.

“There was no change in rating, but a review based on growth outlook in 2013,” Marcio Holland, economic policy secretary at the Finance Ministry, said yesterday after S&P announced the outlook revision. “There is no change in economic policy and the environment is conducive to investment. Fiscal policy is anti-cyclical, not expansionary.”

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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