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Old 06-07-2013, 01:53 PM
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Default Brazil Rating Outlook Cut to Negative by S&P on Sluggish Growth

By Boris Korby & Julia Leite - Jun 6, 2013 8:57 PM ET
Brazil’s credit rating outlook was cut to negative by Standard & Poor’s, which said sluggisheconomic growth and an expansionary fiscal policy could lead to an increase in the government’s debt levels.
S&P said in a statement yesterday that it lowered the outlook on Brazil’s BBB rating, which is two levels above junk and in line with Mexico and Russia, from stable. The rating company also cut the outlooks for state-controlled oil company Petroleo Brasileiro SA and government-run utility Centrais Eletricas Brasileiras SA.
The move, which threatens to end a decade-long stretch of rating upgrades for Latin America’s biggest country, was triggered by forecasts for a third year of “modest” economic growth, “weaker” fiscal policy and a deterioration in the government’s credibility, S&P said. Yields on Brazil’s dollar bonds have surged an average 0.81 percentage point in the past month to 4.49 percent. The outlook revision may prompt Brazilian debt to underperform, according to Siobhan Morden, a fixed-income strategist at Jefferies Group LLC.
“It has to do with policy inconsistency, the low-growth high-inflation trade off, and the loss of credibility of the central bank,” Morden said in a phone interview from New York.
Brazil’s economy expanded 0.9 percent last year and is forecast to grow just 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.
‘Not Expansionary’

Annual inflation, which was 6.49 percent in April, has remained above the 4.5 percent midpoint of Brazil’s target range since central bank president Alexandre Tombini took office in January 2011.
“There was no change in rating, but a review based on growth outlook in 2013,” said Marcio Holland, economic policy secretary at the Finance Ministry. “ There is no change in economic policy and the environment is conducive to investment. Fiscal policy is anti-cyclical, not expansionary.”
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.
“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.
Opposite Direction

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. Investors ignored 56 percent of Moody’s Investors Service’s rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
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.
To contact the reporter on this story: Boris Korby in New York at; Julia Leite in New York at
To contact the editor responsible for this story: David Papadopoulos at
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