S&P cuts Brazil deeper into junk territory

Standard & Poor's downgraded Brazil's credit rating deeper into junk territory on Wednesday, citing its failure to curb its fiscal deficit, in a surprise blow to President Dilma Rousseff`s bid to haul the economy out of its worst recession in decades.S&P cut the long-term foreign currency sovereign credit rating on Brazil to 'BB' from 'BB+' and the long-term local currency rating to 'BB' from 'BBB-'. The outlook is negative.
The new level, two steps below investment grade, puts Brazil on par with countries including Bolivia, Paraguay and Guatemala. 

The downgrade reflects that Brazil's credit profile has weakened  further since Sept. 9, 2015, when S&P last lowered the ratings. The political and economic challenges Brazil faces remain considerable. S&P now expects a more  prolonged adjustment process with a slower correction in fiscal policy, as well as another year of steep economic contraction.

Execution risks to corrective fiscal policy remain high in the near term following the government's inability to pass some budgetary measures in late 2015, which are now complicated by the impeachment proceedings of President Dilma Rousseff underway in Congress. In addition, despite government plans to table structural reform, such as on pensions, we expect the political environment after the conclusion of the impeachment process to also limit the viability of reforms–regardless of who is president. The ongoing corruption investigations continue to weigh heavily on near-term policy cohesion. 

The negative outlook reflects that S&P believes there is a greater than one–in–three likelihood of a further downgrade because of the risk of potential key policy reversals given Brazil's fluid political dynamics and inconsistent policy initiatives, or as a result of greater economic turmoil than currently expect.