Brazil pledges to forge on with reforms after S&P downgrade

Brazil vowed on Thursday to push on with economic reforms after the international credit ratings agency Standard and Poor’s downgraded its long-term credit rating because of “slower-than-expected” changes by President Michel Temer’s government.

“The government reiterates its commitment” to forge on with measures such as a reform of pensions in an effort “to guarantee the sustainable growth of the Brazilian economy and long-term fiscal balance,” the finance ministry said in a statement.

S&P earlier announced it was downgrading Brazil’s credit standing further into junk status, at BB- because of its disappointing efforts to “correct structural fiscal slippage and rising debt levels on a timely basis.”

There was also uncertainty from Brazilian presidential elections later this year, in which Temer was not standing.

The agency kept Brazil’s short-term rating at B.

S&P said there was “less than one-in-three likelihood” of it changing its long-term rating, either up or down, over the coming year.

“This reflects Brazil’s comparative external and monetary policy strengths that help offset significant fiscal weakness, an economy with growth prospects lower than peers, and our view that effectiveness of policymaking across branches of government has weakened,” it said.

It noted “lack of support” among Brazilian politicians for stronger fiscal measures, and expressed pessimism that whoever ends up leading the country after elections would have the “significant political capital” needed to pass reforms.

“While the economy has stabilized, we see slow growth and fiscal weaknesses as key credit constraints,” the ratings agency said.

The finance ministry said the S&P downgrade showed the “need and urgency” for reforms to be approved by Brazil’s Congress, notably the pensions system.

Brazil’s economy is projected to grow two percent this year, according to an annual report by the United Nations-backed Economic Commission for Latin America and the Caribbean (CEPAL) released last month.

While unspectacular, that is far better than the 0.2 percent expected for 2017, or the two years of Brazil’s worst-ever recession preceding that.

The government’s own projections are slightly more optimistic: three percent in 2018 and 1.1 percent in 2017.

Temer remains unpopular with voters, clouding the political outlook ahead of the presidential elections, the first round of which is scheduled for October 7, with a run-off on October 28.

The frontrunners for the election so far are leftist former president Luiz Inacio Lula da Silva and rightwing former army officer Jair Bolsonaro. Neither man is much welcomed by investors.