By Paulo Trevisani
BRASÍLIA--Standard & Poor's Ratings Services on Tuesday
downgraded its outlook for Brazil's sovereign debt, saying the
government will have to show firmer resolve to tackle the country's
fiscal woes if it hopes to maintain the nation's investment-grade
credit rating.
S&P cut the outlook for Brazil's foreign-currency debt to
negative from stable, while keeping the rating at BBB-, its lowest
investment-grade level. Just four months ago, the agency had
reaffirmed a stable outlook, but economic and political conditions
have deteriorated quickly since then.
Since March, "risks have tilted to the down side," said
S&P's primary analyst for Brazil, Lisa Schineller, in a
conference call. A deeper-than-expected economic slowdown and
congressional resistance to fiscal-austerity measures have made it
more challenging to reduce the country's heavy debt burden, which
stands at 62.5% of GDP, a level considered by many analysts to be
too high for investment-grade status.
Without mentioning the downgrade, the Finance Ministry said in a
statement released late Tuesday that "the process of rebalancing
our economy...is following its due course and will bring in a few
months' time new conditions of competitiveness for the Brazilian
economy."
Another rating cut by S&P would move Brazil to junk status,
likely increasing borrowing costs and prompting risk-averse
investors to dump their holdings of Brazilian debt.
The outlook review spooked markets already concerned that Brazil
could be downgraded to junk level. The Brazilian real reached 3.43
per dollar, a level not seen in 12 years, before gaining some
ground and closing at 3.38 per dollar.
The other two major credit-ratings firms, Moody's and Fitch,
both rate the country's bonds two notches into investment grade,
also with a negative outlook.
Recently, a local, small rating agency called Austin Rating cut
the sovereign debt to junk status.
S&P officials said that, despite positive changes in
economic policy earlier this year, a tense political climate has
lowered the chances that Brazil could manage its sizable debt load
in the long term.
Ms. Schineller said there is a "greater than 1-in-3 likelihood"
that early efforts to fix the economy could be unwound given
Brazil's fiery politics. Citing resistance in Congress to
spending-cut and tax-raising measures pushed by President Dilma
Rousseff's administration, she said that Brazil is now likely to
take longer to reverse its economic problems.
But nervousness about S&P's move could be exaggerated, some
analysts said.
"Honestly, it isn't so bad. What would've been really bad is a
credit-rating cut," said Pablo Spyer, from Mirae, an
asset-management firm in São Paulo. "The outlook cut means the
government needs to work on adjustments" to economic policy, he
said.
This year the Brazilian government has been trying to eliminate
expensive tax breaks and subsidies it used in the past few years to
stimulate the economy.
The past policies made the debt balloon, but failed to restore
growth. GDP was flat last year and is expected to contract by 2% in
2015, according to some forecasts.
But reversing course has proved difficult, as a weakened Ms.
Rousseff has lost influence with an increasingly rebellious
Congress. Her approval rate was a mere 7.7% in a recent poll, and
leaders of both houses have opposed fiscal-austerity measures.
Declining tax revenue forced Finance Minister Joaquim Levy to
reduce this year's target for a primary surplus, or government
savings before interest payments, to 0.15% of GDP from 1.1% of GDP
last week. The primary surplus is seen as a gauge of the country's
ability to pay down debt.
S&P cited increased risks that impeachment proceedings be
initiated against President Rousseff, as well as political backlash
against her administration in Congress.
"Fluidity in the political dynamics has increased more
recently...this is going to weigh on execution" of economic policy,
Ms. Schineller said.
S&P also mentioned ongoing corruption investigations that
involve high-profile politicians as a risk factor. Prosecutors are
probing what they describe as a cartel of some of the country's
largest construction firms allegedly skimming billions of dollars
from government-controlled energy giant Petróleo Brasileiro SA, or
Petrobras, for at least a decade. Part of the proceeds, prosecutors
say, was illegally diverted to politicians, some of them from Ms.
Rousseff's own Workers' Party.
Petrobras has said it is a victim in the alleged scheme and is
cooperating with investigations. President Rousseff hasn't been
accused in the process and has denied any knowledge of wrongdoing
at Petrobras. The Workers' Party has repeatedly denied
wrongdoing.
In a separate case, Brazil's government accounting watchdog has
called into question the administration's 2014 books, and may
recommend that Congress reject the accounting, in which case the
president might be subject to an impeachment process.
Write to Paulo Trevisani at paulo.trevisani@wsj.com