SAO PAULO (REUTERS) - Fitch Ratings on Thursday (Oct 15) cut Brazil's credit rating to the brink of junk, warning the country could soon lose its coveted investment grade rating as government finances deteriorate amid a prolonged recession and persistent political uncertainty.
Fitch cut Brazil's rating to BBB-minus from BBB. It left a negative outlook on the new rating, suggesting it could become the second major rating agency to downgrade Brazil to junk status within the next year or so.
The decision, which is likely to increase borrowing costs for the government and Brazilian companies, adds pressure on President Dilma Rousseff to push crucial savings measures through Congress.
Yet additional austerity could push Latin America's largest economy deeper into recession, further weakening a government already crippled by political gridlock and mounting opposition from legislators.
A second move into junk territory would trigger further losses for Brazil's economy, because it could force some investors to sell some of their assets in the country.
"The negative outlook reflects Fitch's view that economic and fiscal underperformance is likely to persist while political uncertainty could continue weighing on broader confidence,"Fitch said in a statement.
The uncertainty, Fitch added, would "delay a turnaround in investment and growth."
The Brazilian real seesawed following the decision, although it ended Thursday slightly stronger. More analysts are expecting another downgrade to take place within the next few months.
Fitch's decision comes little more than a month after Standard & Poor's stripped Brazil of its investment-grade rating, saying mounting political problems have muddled economic policy in the country.
A second downgrade to junk could have an even greater market impact than the first because many investors are prevented from holding bonds that are not rated investment grade by at least two ratings firms.
"Fitch is giving us some time to advance in the direction of the necessary fiscal adjustments," said Carlos Kawall, chief economist with J Safra Banco do Investimento in Sao Paulo. "But they're not going to wait a whole year, it's very clear that their patience is shorter."
An official at Brazil's Finance Ministry said it was "terrible" that Fitch kept a negative outlook on Brazil's rating. A Rousseff aide said the downgrade is a "matter of concern."
The Rousseff aide took note of congressional foot-dragging on proposed tax hikes and spending cuts aimed at raising 65 billion reais (S$23.2 billion) to bridge a gap in next year's budget. With increasing cries from the opposition in favor of Rousseff's impeachment over alleged accounting irregularities, legislators have not taken action on the proposals.
"We hope the downgrade puts some pressure on Congress," the aide said.