Brazil’s Rousseff Huddles with Cabinet as Investors Flee Real
A day after Standard & Poor’s slashed Brazil’s credit rating to junk, the real fell to its weakest level since 2002
By John Lyons and Paul Kiernan
Brazil's President Dilma Rousseff, on Sept. 2. Photo: Eraldo Peres/Associated Press SÃO PAULO—President Dilma Rousseff summoned an emergency cabinet meeting Thursday to address an economic crisis threatening her fragile government. But as she scrambled for political survival, investors scrambled for the safety of the dollar.
A day after Standard & Poor’s slashed Brazil’s credit rating to junk, the Brazilian real lost close to 2% by the end of the day to 3.865 per dollar—its weakest level since 2002. In an effort to stem the decline, Brazil’s central bank injected $1.5 billion into the financial system Thursday.
The real, among the worst performing currencies in the world against the U.S. dollar, has shed essentially all the gains of the long commodity boom that lifted Brazil’s economy and made it a darling for global investors.
“A lot of people are getting out of Brazil, and I don’t think everyone who will get out has gotten out,” said Win Thin, a currency strategist at Brown Brothers Harriman in New York.
Daniel Felipe Vieira Pires, a 29-year-old lawyer in Rio de Janeiro, said with the real crashing, he has shelved plans to go to Europe. These days, more than just travel plans are being recast in crisis-racked Brazil.
The Standard & Poor’s downgrade late Wednesday was the latest stark reminder of Brazil’s dramatic economic downturn in the face of slowing growth from chief trade partner China, a key buyer of Brazil’s iron ore and other resources.
When Brazil achieved an investment-grade credit rating from the ratings agency in 2008, Brazilian leaders hailed the event as proof that the long volatile South American nation was graduating to higher standards of stability and prosperity.
But it was not to be. Instead, this week’s credit rating downgrade points to fundamental obstacles to growth that some investors overlooked as a windfall of rising commodity prices spurred global frenzy for investing in emerging markets. Brazil’s benchmark stock index is down 20% over the past year and has dropped nearly twice that much since reaching a high in 2008.
Daniel Felipe Vieira Pires, a 29-year-old lawyer in Rio de Janeiro, said with the real crashing, he has shelved plans to go to Europe. These days, more than just travel plans are being recast in crisis-racked Brazil.
The Standard & Poor’s downgrade late Wednesday was the latest stark reminder of Brazil’s dramatic economic downturn in the face of slowing growth from chief trade partner China, a key buyer of Brazil’s iron ore and other resources.
When Brazil achieved an investment-grade credit rating from the ratings agency in 2008, Brazilian leaders hailed the event as proof that the long volatile South American nation was graduating to higher standards of stability and prosperity.
But it was not to be. Instead, this week’s credit rating downgrade points to fundamental obstacles to growth that some investors overlooked as a windfall of rising commodity prices spurred global frenzy for investing in emerging markets. Brazil’s benchmark stock index is down 20% over the past year and has dropped nearly twice that much since reaching a high in 2008.
“The budget that was tabled last week, in our view, signaled a change,” Lisa Schineller, managing director on the sovereign ratings team at S&P. “It was a change in our view of likelihood of cohesion, moving forward with a solid plan.”
Brazil’s economy is suffering its worst recession in a quarter-century, forecast to shrink 2.4% this year and 0.5% in 2016. But policy makers’ ability to support growth remains hamstrung by an inflation rate more than double the official target and a widening fiscal deficit that most economists say must be addressed by spending cuts and tax increases alike.
Brazil’s budget deficit in the year ended July 31 approached a dizzying 9% of gross domestic product, nearly triple the shortfall in 2013.
Ratings firm Standard & Poor’s cut Brazil’s debt rating to junk-grade BB+. The other two main ratings agencies, Fitch and Moody’s Investors Service, both still rate Brazil as an investment-grade credit. That is important because some large investment funds are required to sell securities if two agencies rate it junk.
“It’s very, very hard to be a portfolio manager at this time,” said Frederico Mesnik, a founding partner at São Paulo-based Humaitá Investimentos. His firm’s assets under management has fallen to 40 million reals from 230 million reals two years ago as growing political uncertainty damped clients’ appetite for equities. “It’s very hard for us to look beyond a couple of weeks.”
After Ms. Rousseff called the emergency cabinet meeting Thursday, Finance Minister Joaquim Levy told reporters the country would consider tax increases and other measures to prevent another credit downgrade.
“We know the market doesn’t calm down with words, it calms down with actions,” Mr. Levy said at a Thursday news conference in Brasília.
But Mr. Levy has tried and failed before to push through measures he said are needed to put Brazil on a solid financial footing. After taking office in January with the mission to save Brazil’s investment-grade credit rating, Mr. Levy sought to introduce a series of spending cuts and limits. His most significant moves, however, have been delayed or watered down in Congress. Though Mr. Levy is generally respected by investors, his struggles to get measures passed added to investor skepticism.
—Paulo Trevisani and Luciana Magalhaes contributed to this article.
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