Brazil’s downgrade: A blessing in disguise
September 13, 2015, 4:07 pm

With consumer and business confidence eroded in Latin America’s biggest economy, Brazil-watchers feared the inevitable loss of its investment grade.

But, last Wednesday night (September 10), the announcement still managed to catch the markets by surprise.

Brazil did receive its downgrade from Standard & Poor’s, seven years after having received the investment grade level in 2008, during former President Luis Inácio Lula da Silva´s administration.

Of the three biggest ratings companies, S&P has taken the toughest stance on Brazil, lowering its investment grade to BB+ and keeping a negative outlook on its debt.

This downgrade from S&P also came sooner than most expected.

After President Dilma Rousseff’s team played down the threat of a credit downgrade, now that Brazil belongs, yet again, to a group whose government bonds are considered junk, should we brace ourselves for more bad news?

Slowly the “new Brazil”, a booming, investment-friendly South American nation that Brazilians believed was steaming towards a future of prosperity and global clout, is dissipating.

The most immediate concern of Brazilians following the downgrade was the uncertainty regarding Finance Minister Joaquim Levy continuing to serve in the Cabinet.

Levy, who took over as finance minister in January, had proposed a fiscal-austerity agenda that was deemed crucial to staving off a credit downgrade. The government, however, has been thwarted by lawmakers who rebelled amid rising unemployment and the president’s falling popularity.

On the day the S&P announced its downgrade, Levy in an interview to a Brazilian TV station, said that the downgrade could finally convince reluctant Brazilian policy makers to back proposed tax hikes. Levy said the government would try to beat its own forecast and post a budget surplus next year.

This was a critical message to send out.

Levy, although initially hailed as the man to pull Brazil’s economy out of stagnation, did not enjoy the full backing of his colleagues, with many in the Rousseff team not agreeing with his recent prescriptions of bitter medicine.

Nelson Barbosa, Minister of Planning, Budget, and Management and Aloizio Mercadante, the president’s influential chief of staff who are proponents of state-led development policies, have locked horns with Levy over the severity of his austerity proposals.

“Slowly the “new Brazil”, a booming, investment-friendly South American nation that Brazilians believed was steaming towards a future of prosperity and global clout, is dissipating” [Xinhua]

What this means in practice? More powers to Levy.

To laud Rousseff, she lost no time in reacting to the downgrade.

On September 10, a shaky day for Brazil, Rousseff urged her economic team to hasten public spending cuts, including administrative reforms, such as a recently-announced cut in the number of ministries. She also announced she is “fully committed” to achieving a primary surplus next year.

Indeed, there is good reason to believe this premature downgrade might help Levy in pushing his policies and in this arm wrestling with Barbosa and Mercadante.

“The sooner we adjust, the less costly that transition will be. We think we have increasing awareness in Congress about the need for that, especially after yesterday’s events. We want to have all of the resources and spending compatible with achieving the 0.7 per cent, that’s the strategy,” Levy told journalists.

Rousseff’s prudent Finance Minister, fortunately, seems to understand the role of rating agencies in the market and has done well not to confront them or discredit them.

Instead he said he would take necessary measures so that the market and the rating agencies regain confidence in this BRICS member.

He said, “One of the agencies may have been hasty. When we show that this process [new measures to strengthen fiscal adjustment], which have already been in progress, will conclude in a few weeks, I think maybe the desire for reviewing Brazil’s grade will decrease among the other agencies”.

This rationality has not always been the prominent trait of Brazilian Finance Ministers.

Guido Mantega, Levy’s predecessor over whom Rousseff had some infamous tiffs with the London-based Economist magazine, was extremely critical of the threats of credit ratings agencies and chose instead to act as a doctor who blamed the thermometer for the patient’s fever.

In 2010 he said: “[Agencies] were saying that certain transactions were safe when they were not. They also often give grades that do not match the reality. Brazil has BBB +, but should have more than that for their condition compared with other countries”.

There is no doubt that Brazil has been suffering the biggest crisis since the beginning of Plano Real in 1993. (The Plano Real {Real Plan} was a daring economic initiative that tamed inflation and implemented much-needed reforms that began putting Brazil’s finances in order.)

There is no denying that Brazil just lost its investment grade owing to increasing government spending.

Since he has taken office, an embattled Levy has been doing the adjustments necessary to avoid that, as well as to recover market confidence.

But more change is needed if Brazil is to return to the path set by the ‘Real Plan’. Rousseff’s team need to curb spending and get the state out of the business of micromanaging investment decisions.

But the spectre that hangs above them all is the debilitating political crisis that President Rousseff faces.

She no longer has the support of the Congress or even that of her Vice President, Michel Temer.

She, of all people, knows the economic roadblocks will be difficult to overcome unless the political deadlock is lifted.

Till then, “Joaquim Scissorhands” Levy has no choice but to unleash more austerity measures.