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The S&P Cuts Brazil’s Outlook on Sluggish Growth

“Brazil’s credit rating outlook was cut to negative by Standard & Poor’s, which said sluggish economic growth and an expansionary fiscal policy could lead to an increase in the government’s debt levels.

S&P said in a statement yesterday that it lowered the outlook on Brazil’s BBB rating, which is two levels above junk and in line with Mexico and Russia, from stable. The rating company also cut the outlooks for state-controlled oil company Petroleo Brasileiro SA and government-run utility Centrais Eletricas Brasileiras SA.

The move, which threatens to end a decade-long stretch of rating upgrades for Latin America’s biggest country, was triggered by forecasts for a third year of “modest” economic growth, “weaker” fiscal policy and a deterioration in the government’s credibility, S&P said. Yields onBrazil’s dollar bonds have surged an average 0.81 percentage point in the past month to 4.49 percent. The outlook revision may prompt Brazilian debt to underperform, according to Siobhan Morden, a fixed-income strategist at Jefferies Group LLC.

“It has to do with policy inconsistency, the low-growth high-inflation trade off, and the loss of credibility of the central bank,” Morden said in a phone interview from New York.

Brazil’s economy expanded 0.9 percent last year and is forecast to grow just 2.77 percent in 2013, according to a central bank survey published June 3. Quickening inflation has prompted policy makers to boost interest rates by 0.75 percentage point this year after they lowered borrowing costs by 5.25 percentage points in cuts that began in August 2011.

‘Not Expansionary’…”

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