S&P takes negative outlook on Brazil due to slow growth

Reuters: Standard & Poor’s revised its outlook on long-term ratings for Brazil’s sovereign debt to negative from stable on Thursday, citing deteriorating fiscal fundamentals and slow economic growth under left-leaning President Dilma Rousseff.

The darker outlook was the latest blow to Latin America’s largest economy, which has also seen its currency battered and economic growth data fall short of expectations in the last few weeks as investors lose faith in what just two years ago was considered an overwhelming success story.

The ratings agency affirmed its BBB long-term and A2 short-term ratings, but said the negative outlook reflects the at least one-in-three probability of a downgrade of Brazil over the next two years. “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,” S&P said.

Rousseff’s Government quickly downplayed S&P’s announcement, pointing to the country’s falling debt-to-GDP ratio and emphasising that economic growth was picking up and private investment was rising. “We are on a growth trajectory, with growth in private investment. We’re also regaining the confidence of economic agents,” the Finance Ministry’s Economic Policy Secretary Marcio Holland told reporters.

Brazil grew just 0.9% last year, and analysts expect growth well under 3% in 2013 as the economy struggles with low investment, high business costs, and severe infrastructure bottlenecks that it is just beginning to tackle.

Rousseff has tried to kick-start the economy by passing tax cuts and getting the private sector more involved in the construction of highways and airports. But many of those efforts have yet to bear fruit. “Delays in implementing policies to boost private investment, especially in infrastructure, could contribute to low GDP growth this year and next, thereby raising the risk of further fiscal slippage and a resulting rise in the Government’s debt burden,” S&P said.

S&P also said it could change the outlook back to stable if the Government adopted more consistent policies that generate greater private-sector confidence and higher investment. This would boost the country’s trend rate of GDP growth, giving the Government more fiscal and monetary flexibility, it said.