Indebtedness and low investments among Brazil's weaknesses, says S&P

After having its investment rating downgraded from BBB to a BBB- with a stable outlook, Brazil might be warned about a potential new cut if the government fails to fulfill its fiscal stability commitment and bring down indebtedness, says Standard & Poor's Senior Director Sebastian Briozzo. In his view, the adjustments the country needs cannot be easily made, but they do no depend on international factors. “That's why the outlook was set as stable and not negative.”

“The world might not be of much help from now on. [...]. But I do think that, with its domestic conditions, its important internal markets, and the potential of its oil sector, […], Brazil has all it takes to move forwards,” he said.

Briozzo further stated that the goals set by the government's new economic team, “if met in the short run, might help confirm the stable outlook” and avoid a downgrade. “We believe the commitment to prudent policies is crucial,” he remarked.

In order to change this scenario and improve its rating, Brazil will have to increase the level of both public and private investments—which Briozzo described as one of the country's weaknesses. “Clearly, the private sector is more important, but, no country in the world can see its GDP grow at a rapid pace when investments in the public sector are as low as they are in Brazil—close to 1.5% of the GDP. Brazil's among the emerging markets with the heaviest tax burdens and lowest public investments.”

Standard & Poor's highlighted as one of Brazil's strengths the existence of solid and well-established political institutions, especially if compared to other BRICS countries, like Russia and South Africa. Another asset mentioned was the country's commitment to prudent public targets.

Sebastian Briozzo argues that Brazil will have a hard time speeding up its growth if far-reaching reforms—a tax reform, or a social security reform—are not carried out. What makes the executive concerned, however, is the fact that this discussion has not been given the importance it deserves: “Such reforms take time, and one of the things that makes us concerned is that this discussion is not taken to a high enough level.”

In 2003, Brazil had a B+ rating with a negative outlook, and in 2008 was given investment rating by reaching BBB-. In 2011, the evaluation improved even further, hitting BBB, but went down to BBB- this year, thus far with no new downgrade on the horizon.

Translated by Fabrício Ferreira