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Standard & Poor’s Downgrades Brazil’s Credit Rating to Junk

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Brazil in trouble

Brazil, Latin America’s largest economy and one of the emerging markets of the BRICS countries, was downgraded by the US rating agency Standard & Poor’s (or S&P) to junk status on September 9, 2015. The impact rippled through Brazil’s stock markets on September 10. The iShares MSCI Brazil Capped ETF (EWZ) fell by 1.45% on the day.

The graph below shows the price movement of EWZ since June 1, 2015.

EWZ’s slide results from a variety of factors. Standard & Poor’s lowered its outlook for the country from stable to lower medium grade on July 28, raising alarms regarding the country’s credit risk profile.

Further, S&P’s rating downgrade for Brazil from BBB- to BB+ relegated the country to junk investment status, citing the country’s economic recession.

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Reasons behind the downgrade

Brazil is currently facing a variety of issues:

  • Increasing foreign debt
  • Falling prices of export commodities like sugar, coffee, soybeans, and oil that form the majority of the country’s export revenue
  • Ever-rising inflation and interest rates, as well as the depreciating currency
  • Mounting political instability on the domestic front
  • Difficulties faced by the government in handling the country’s rising debt
  • Negative outlook due to corruption and scandals, as we saw in the case of Petrobras

All these factors have created economic turmoil in the country, and Brazil has slid into recession. The stocks of the companies from the basic material sector like Petrobras (PBR.A), Petroleo Brasileiro Petrobras SA (PBR), and Ultrapar Holdings (UGP) were hurt on September 10, 2015, following S&P’s downgrade. Stocks like Branco Bradesco (BBD) and Itau Unibanco Holding (ITUB), which are foreign regional banks, also fell the same day.

In the next part, let’s analyze the effect of Brazil’s downgrade on other major companies in Latin America’s largest country.

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