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Fitch Downgrades Brazil Again Just Days Before Senate Vote on Impeachment

05/06/2016 - 11h04

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FROM SÃO PAULO

Political uncertainty and the deteriorating economic situation has led the risk classification agency Fitch to downgrade Brazil once again, just days from a possible change of government, with the Senate due to vote on the suspension of President Dilma Rousseff next week.

Fitch downgraded Brazil from BB+ to BB, the second rating below investment grade status. This status is the classification given to countries considered to be at least risk of default, which are thereby able to borrow at more favorable interest rates.

The outlook is negative, and there is the possibility of another downgrade in the coming months. Fitch stripped Brazil of its investment grade status in December.

With this new downgrade, Fitch brings Brazil's rating into line with that of the other two main risk classification agencies, Standard and Poor's and Moody's. Nobody at the Ministry of Finance was available for comment.

In a statement published on Thursday (5) night, Fitch said that the Brazilian economy is deteriorating faster than expected. GDP is due to shrink 3.8% this year and grow just 0.5% in 2017. These projections are down from those made at the end of 2015, when the economy was predicted to shrink 2.5% this year and grow 1.2% in 2017.

Fitch highlighted the government's inability to meet its fiscal targets. This year, the government has proposed making the target more flexible, in order to pay the interest on public debt. If approved in Congress, it will permit a deficit of 1.5% of GDP after the negative result of 2% last year.

Public debt could reach 80% of GDP in 2017, which would make Brazil one of the biggest debtors amongst the countries with the same rating. Bolivia, Croatia, Paraguay and Guatemala are also BB rated.

In an event held in São Paulo on Wednesday (4), Fitch indicated that the prospects for Brazil in the medium term were stable to negative, with a more than 50% chance of a new downgrade within the next 12 months.

Fitch said that political transition - if the Senate ratifies impeachment proceedings against President Rousseff next week - could represent a new opportunity for economic adjustment and structural reform, but that difficulties remain.

However, the agency stressed the uncertainty regarding the ability of a new government to form a coalition stable enough to pass the necessary reforms.

According to Fitch, a new downgrade will occur if the government fails to control public debt or is unable to implement measures that improve growth projections and public finances.

However, it is not all bad news. Inflation has fallen, after hitting a peak of 10.7% in 12 months, which was reached in January. Another positive sign is the rebalancing of Brazil's external accounts.

Translated by TOM GATEHOUSE

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