Fitch Joins Other Rating Agencies to Classify Brazil’s Credit Rating as Junk

Fitch expects Brazil’s economy to contract 3.8% in 2016 due to “the high level of political uncertainty” as well as deteriorating labor markets and a slowdown in Brazil's top trading partner, China.

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Ratings agency Fitch has downgraded Brazil’s sovereign debt further into junk territory, making it still harder for the recession-hit Latin American country to borrow in the international credit market.

Changing policy over and over again at a time the economy is contracting deeper has undermined Brazil’s credibility, says Fitch. The South American giant is in both political and economic turmoil, with President Dilma Rousseff struggling to save her seat amid impeachment talks.

Barely four months ago in December, the ratings agency had stripped Brazil of its investment-grade rating and now it has dealt another blow. Not just Fitch — even S&P and Moody’s classify Brazil as junk.

Fitch expects Brazil’s economy to contract 3.8% in 2016 due to “the high level of political uncertainty” as well as deteriorating labor markets and a slowdown in Brazil’s top trading partner, China.

According to some reports, Fitch’s Brazil director, Rafael Guedes, has drawn parallel between Brazil’s current crisis and Argentina’s 2001 default. What prompted this rating is Brazil’s mountain of debt. If the South American giant cuts back on its debt, many agencies may immediately upgrade its rating.

“The maintenance of the negative outlook reflects continued uncertainty surrounding the progress that can be made to improve the outlook for growth, public finances and the government debt trajectory,” Fitch said in a statement.

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Continued legislative gridlock is another issue plaguing the economy. If President Rousseff ends up facing impeachment, Brazil’s economy would slide deeper into recession. The senate is scheduled to begin voting on Wednesday on whether to put Rousseff on trial. If the senate votes to do so, she would be suspended from office for up to 180 days while the proceedings go forward.

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