Agency Keeps Brazil at Low High Grade

S&P Monday affirmed its BBB minus (stable) rating on Brazil despite ongoing macro deterioration and concerns about the debt load. “The low investment-grade rating on Brazil remains supported by a solid commitment to prudent macroeconomic policies during times when the international credit crunch and global economic slowdown have significantly affected the local economy,” says S&P credit analyst Sebastian Briozzo. “The reaffirmation of this commitment remains critical for Brazil to protect the recent improvement in fundamentals and to regain a sustainable growth trajectory once the global economy stabilizes.” The shop notes that president Lula’s strong popularity will likely facilitate implementation of policy to deal with significant economic challenges in 2009. However, “challenges will continue in 2010, a year with presidential elections, as the economy recovers only gradually,” says Briozzo. S&P expects Brazil’s GDP to decline by about 1% in 2009, compared with 5.1% growth last year. While complying with the primary surplus target will be increasingly challenging because of the underperformance of fiscal revenue, the agency expects longer-term implications for debt sustainability to be contained. S&P expects the general government deficit to reach 3.0% of GDP in 2009 versus 2.1% in 2008. “The government’s relatively high debt level and still-high interest burden remain major weaknesses to the ratings on Brazil,” says Briozzo. “These two factors will require fiscal responsibility over the medium term.” He adds that a reduction in external vulnerabilities provides additional cushion to weather the negative shock. “This is positive for the credit, because we worried that the likely deterioration of the sovereign’s fiscal position would put at risk the outlook,” says Goldman Sachs.