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S&P’s warning of a possible rating downgrade in June prompts rethink
S&P’s warning of a possible rating downgrade in June prompted Brazilian President Dilma Rousseff to rethink her government’s economic strategy, altering her stance to appease rating agencies and investors.
Rousseff, a leftist economist, vowed to keep government finances in order by limiting public spending, raised returns for potential investors in infrastructure projects and promised to scale back on capital transfers to state-run banks.
“Those signals are very important, but they need to be backed up with actual actions,” said Lisa Schineller, S&P’s secondary analyst for Brazil and chief Latin America economist. “A track record would need to be established.”
Three years of subpar growth and a widening current account deficit in Brazil has dampened investors’ views on what was until recently an emerging-market success story.
Brazilian officials have said the pessimism is exaggerated, downplaying threats of a ratings downgrade by saying its debt levels remain much healthier than in most developed countries and that foreign investment keeps flowing.
The major iron ore and soy exporter has seen its economy slow from a staggering 7.5 percent pace in 2010 to just 0.9 percent last year, much lower than neighboring Peru and even Bolivia, one of the poorest countries in the region.
Back in June, S&P affirmed its BBB long-term and A2 short-term ratings on Brazil, but said the negative outlook reflects at least a one-in-three probability of a downgrade of the country over the next two years.
A looming reduction in U.S. monetary stimulus has put more pressure on the country’s balance of payments as investors drop riskier assets to chase rising returns in the United States.
On top of that, Rousseff will also face growing pressure to spend more next year ahead of a presidential election in which she is widely expected to run.
“That’s when the change in tone is important, but again you also would need to see some follow through,” said Schineller at the sidelines of the International Monetary Fund and World Bank annual meeting in Washington.
“The accounting maneuvering and fogginess around the primary surplus has created a credibility challenge for the government.”
The Rousseff administration came under fire last year for removing some expenditures and using cash from a sovereign fund to fatten state coffers in order to reach its 2012 primary surplus goal. The primary budget balance, which represents the public sector’s excess revenue over expenditures before debt payments, is closely watched by investors as a measure of the country’s ability to repay debt.
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