S&P cuts Brazil credit rating to junk

By Ben Tavener

SAO PAULO

 Brazil was stripped of its prized investment-grade rating Wednesday in a major blow to Latin America's largest economy already devastated by political and economic uncertainty.

The Standard & Poor's (S&P) credit ratings agency said it had lowered the country's sovereign rating by one notch to BB+ from BBB-.

S&P cited mounting "political challenges" and argued that the change "reflects internal disagreement about the composition and magnitude of measures needed to redress the slippage in public finances".

President Dilma Rousseff's fractious relations with Congress about measures to boost the economy and rebalance the country's books, as well as the increasing isolation of Finance Minister Joaquim Levy, have made investors recoil.

The U.S.-based agency said it maintained Brazil's negative outlook, believing there is "a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil's fiscal position".

Rousseff has struggled to shore up public accounts, recently delivering to Congress a 2016 budget proposal with an unprecedented primary deficit -- 30.5 billion reais ($8 billion), or about 0.5 percent of GDP. This is despite having pledged a 0.7 percent primary surplus in July, itself revised down from 2 percent at the start of the year.

Brazil also recently re-entered recession after second-quarter results showed the economy had shrunk by 1.9 percent. Economists now believe GDP will contract by around 2.5 percent this year.

The real has also weakened 45 percent against the dollar so far this year, and interest rates were recently held at an eye-watering 14.25 percent in a bid by Brazil's central bank to stem near 10 percent inflation.

A sprawling corruption scandal at state-run oil giant Petrobras has seen a range of top Brazilian executives and political figures from Rousseff's ruling coalition investigated, arrested and convicted, and left the president's approval rating in single digits, as well as wiping billions of dollars from the country's finances.

Petrobras shares slumped 5.5 percent in after-hours trading on the New York Stock Exchange on news of the downgrade, which broke after markets had closed in Brazil. Mining giant Vale also saw its shares slide 3.4 percent.

Two other major ratings agencies -- Moody's and Fitch -- both have Brazil near or at the bottom rung of investment territory, on Baa3 and BBB, respectively.