Blow for Michel Temer as S&P cuts Brazil credit rating

Blow for Michel Temer as S&P cuts Brazil credit rating

11/01 - Move comes over concern at the pension deficit in Latin America’s biggest economy

Standard & Poor’s downgraded Brazil’s credit rating deeper into junk territory on Thursday, citing the government’s failure to pass key fiscal reforms.  The move by the rating agency is a slap in the face for the administration of President Michel Temer, which has been touting Brazil’s progress in recovering from its worst recession on record. The stock market has also been hitting new records. S&P cut its rating for Latin America’s biggest economy to BB- from BB amid concern over its pension deficit. 

“Passage of legislation to structurally reduce the fiscal deficit remains elusive, creating difficult conditions for the next administration, given Brazil’s high and rising government debt,” S&P sovereign analysts Lisa Schineller and Joydeep Mukherji wrote in a note.

Brazil’s centre-right government is keen to paint a picture of an economy that is growing again after two years of deep recession ahead of elections in October that are expected to be among the most unpredictable in memory. 

The government is also hoping a sharp fall in inflation to its lowest level since 1998 will win support from voters.  “The federal government maintains its commitment to fiscal consolidation,” the finance ministry said in a note in response to the downgrade. It said it remained determined to pass pension reforms and a range of other reforms and to shore up the budget by delaying salary increases for public servants.

But the finance ministry threw the onus on to the congress. “We always count on the approval of the measures necessary for the country through the congress and we are certain the same will continue to work in favour of the reforms,” the finance ministry said. Henrique Meirelles, finance minister, is one of the main proponents of fiscal reform while lawmakers in the congress are wary of backing pension changes in an election year.

S&P initially cut Brazil to junk in 2015 while impeached former president Dilma Rousseff was still in power.

S&P said while Brazil has passed some reforms needed to get its bloated fiscal deficit back under control, pensions remained problematic, consuming 34 per cent of the federal budget before interest payments. 

“Brazil has one of the weakest fiscal stances among rated sovereigns,” S&P said. “Given Brazil’s generous benefits and worsening demographics, pension-related expenditure has grown rapidly.”

The agency was also sceptical that elections in October would produce a leader with the political clout to pass pension reform, which historically has been one of Brazil’s most contentious issues.

“Corruption investigations have discredited many politicians, increasing the likelihood of less experienced outsider candidates in the 2018 elections, which highlights risks for concerted coalition building and passage of difficult legislation,” it said.  But it said Brazil’s new rating was stable, supported by its strong external accounts and credible monetary policy.

“We expect growth to average 2.4 per cent during 2019-2020. Brazil’s growth prospects have been — and will continue to be — below those of other countries at a similar stage of development,” it said.

www.prensa.cancilleria.gob.ar es un sitio web oficial del Gobierno Argentino