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It argued that the S&P downgrade contradicted recent economic growth and market indicators.
“The Brazilian economy has low external vulnerability because it holds the fifth largest volume of international reserves among G20 nations,” it said in a statement.
Although S&P said that its outlook for Brazil in 2014 was stable, the new status means that Brazil is considered at the lowest investment grade by market participants.
S&P cited the sluggish economy and weaker-than-expected growth potential, rising debt, government debt and deficit as the reasons for its downgrade.
The ratings agency said that it expects Brazil’s economy to grow at 1.8 per cent in 2014, down from 2.3 per cent last year.
“The downgrade reflects the combination of fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, a constrained ability to adjust policy ahead of the October presidential elections, and some weakening in Brazil’s external accounts,” S&P said in a statement. “These factors underscore the government’s diminished room for maneuver in the face of external shocks.”
The ratings demotion is likely to frustrate the efforts of Brazilian President Dilma Rousseff, who has implemented a number of government reforms in the past 18 months to boost the economy and spur production.
She has made it a cornerstone of her presidency to battle persistent inflation and currency devaluation – both of which have worked to slow down the economy.
But market data has shown upward trends for Brazil’s economy in recent weeks.
On March 10, Brazil’s official statistics bureau IBGE said that industrial output in January beat forecasts and signaled a rebound in capital goods production.
In December statistics had shown that industrial production had retracted by as much as 3.7 per cent from the month before.
IBGE said that industrial output for February 2014 had grown by 2.9 per cent – 0.4 per cent above estimates, making it the highest jump in a year.
The positive numbers were led by a 10 per cent increase in capital goods production, while consumer goods production rose 3.8 per cent.
On February 28, IBGE showed that Brazil’s economic growth jumped 0.7 per cent in the 4th quarter, exceeding the forecasts of local and international business community insiders, including government officials.
The figures released by the national statistics agency in Rio de Janeiro caught by surprise many experts, most of whom had predicted GDP contraction.
Brazil’s economy shrank by 0.5 per cent in the third quarter.