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Analysts concerned after Brazil rating downgrade

March 25, 2014

BRASÍLIA – Brazil must convince markets that it can grow its economy while also slash spending and curtail inflation, analysts said after the country’s credit rating sunk to near junk status.

The Central Bank said Brazil would respond “robustly” to global economic challenges after Standard & Poor’s lowered its credit rating to BBB-, the lowest level for investment grade debt.

S&P however described Brazil’s overall outlook as stable.

The downgrade was “inconsistent” with economic conditions and “does not reflect Brazil’s solid performance and fundamentals,” the Finance Ministry said in a statement late Monday.

China’s role in growth 

Analysts warn that they see hard times ahead for the World Cup and Olympic hosts, with one indicating that strong 2004-2010 growth had been on the coattails of strong demand from China.

“Having enjoyed years of ‘easy growth’ in 2004-10, driven by Chinese demand, absorption of surplus labor and credit growth, the government and Congress have not pursued structural reforms to sustain growth,” said Robert Wood, Brazil analyst with Economist Intelligence Unit.

Without policy adjustments in 2015, “the outlook will deteriorate further,” Wood said.

São Paulo University’s Manuel Enriquez Garcia said that the years of strong growth fueled hopes that Brazil could become a major economic force. Now this hope “has been lost due to poor management of public accounts and a falloff in growth,” he said.

Austin Rating’s chief economist Alex Agostini added: “There is no confidence that Brazil will control public spending and manage to bring down inflation in an election year.”

Slow growth forecast 

Growth in Brazil has fallen off after peaking at 7.5 percent in 2010. In this World Cup year the government is forecasting growth of 2.5 percent, though markets are less optimistic.

Brazil is also stuttering of late on trade, with a 2013 trade surplus of just $2.56 billion, its lowest in 13 years.

The Central Bank said that, in response, it would combine macroeconomic austerity, exchange rate flexibility and use of liquid reserves to keep share price volatility in check.

In announcing the downgrade, S&P cited the government’s unclear policy signals as it faces a weaker fiscal situation and slower growth.

The agency said the rating cut reflects “slippage” in the government’s fiscal balance, and the prospects that slow growth over the coming years will leave the government less able to strengthen the balance.

It said both cyclical and structural factors were behind the growth outlook, pointing to low investment, which was only 18 percent of GDP last year.

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