Analysis: Downgrading of Brazil's Credit Rating Exposes Government Failings

03/25/2014 - 08h03

When it first began to appear as though Brazil's credit rating might be downgraded, it was already too late for any change in the convictions of the Rousseff administration and in the direction of the government's economic policy.

The ratings agency Standard & Poor's threatened to downgrade Brazil for the first time on July 6 last year, but by this point government spending at both state and federal level had already been determined up until the end of President Rousseff's administration.

Around the same time, hopes began to fade that there would be a return to a pattern of economic growth strong enough to raise tax revenues and balance the budget.

Instead, the government has been reduced to a series of maneuvers aimed at embellishing official statistics. Revenues are brought forward, or overestimated, whilst costs are postponed, or underestimated, in order to give a more favorable impression.

Yesterday, for example, just moments before the downgrading, the government had published an R$4.2 billion (USD $1.8 billion) increase in its (already optimistic) revenue predictions for the year. The value corresponds almost exactly to the money the government has set aside to pay subsidies to the energy sector.

Brazil's rating fell from "BBB" to "BBB-". Were the rating to fall any lower, Brazilian bonds would no longer be considered "investment grade", according to Standard & Poor's. This shows how the government's trickery has fooled no one outside Brasília.

The agency listed a number of irregular measures the government has adopted in recent years, and, like the rest of the market, claims that the government will not hit its fiscal targets for this year.

DOUBTS

Above all, Standard & Poor's raises doubts regarding the ability of the next government to carry out the inevitable period of austerity that will be necessary from next year - doubts exacerbated by the uncertainty surrounding this year's presidential elections.

"There is uncertainty surrounding the size and scope" of the expected economic readjustment, the agency said in a statement. However, currently ahead in the election race, Rousseff believes her fiscal policy is tough enough given the country's fragile economic growth.

She passed up the only chance of a more severe cut in spending this year, which would have been to the education budget. Spending on education already exceeds by R$25 billion (USD $10.8 billion) the mandatory minimum.

The other principal costs are permanent and are not negotiable, such as salaries and benefits, as well as subsidies to Minha Casa, Minha Vida ("My House, My Life", a government social housing program) and now further subsidies to the energy sector. At best, these subsidies can be merely put off, which darkens prospects for the future.

Translated by TOM GATEHOUSE

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	Daniel Marenco - 4.ago.2011/Folhapress
	Brazil's rating fell from "BBB" to "BBB-": were the rating to fall any lower, bonds would no longer be considered "investment grade"