Trouble in Brazil?

The Brazilian economy, already in the grip of a significant recession, has suffered another blow with the downgrading of the country’s credit rating to “junk” status by Standard & Poor’s. The decision follows failed attempts by President Dilma Rousseff and her government to get on top of the country’s debt problems.

This has been quite a turnaround, with an investment-grade rating having been issued as recently as 2008, at which point the economy had been on the up. What has followed, however, with commodity prices plunging and austerity measures kicking in, has seen the economy entering a downward spiral.

It had been expected that such a downgrade might occur, despite the implementation of austerity measures that had been intended to shore up the failing economy, but the earlier than expected decision comes as a considerable blow. Brazil has the largest economy in South America and had, until relatively recently, been seen as a real flag-bearer for emerging nations.

It’s expected that the Brazilian stock market will react with a big plunge and S&P have declared that there is a substantial credit risk for investors. Indeed, there is a possibility that further downgrades may yet follow.

But how it come to this? There is no doubt that S&P have taken into account a flurry of negative announcements, with the state of the Brazilian economy a cause for real concern in the region. Even optimists are suggesting that no recovery should be expected within the next two years.

Some have seen a need to get inflation under control and the President has made use of an austerity programme, in order to achieve that aim. However, that programme is receiving criticism from all sides: even those who are allied to her politically have been distancing themselves from the programme.

The downgrade now means that ratings agencies are broadly aligning the Brazilian economy with that of Russia, which has clearly been under close consideration in recent months. If the current direction of travel continues then it may only be a matter of time before institutional investors are forced to withdraw their investors.

In the face of this latest crisis, government ministers have been keen to try to soothe worries. They have indicated that Brazil will meet all of its financial obligations that its investment-grade rating will return as soon as there is an upturn in the economy. Analysts will undoubtedly be looking on with considerable interest.