The Brazilian real retreated a bit at the current trading session after touching the highest level in fourth months on the previous trading session. The rally has started after Standard & Poor’s cut the nation’s credit rating but changed the outlook from negative to stable, and prices continued to rise till the beginning of this session.
On March 24, S&P lowered Brazil’s sovereign rating from BBB to BBB-, the lowest investment grade. The rating agency explained its decision in the following manner:
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.
As for the improved outlook, the agency said:
The stable outlook reflects our view that Brazil’s institutional and policy framework coupled with its fiscal and external balance sheet strengths afford it sufficient room for maneuver and the ability to withstand external shocks consistent with a low-investment-grade rating.
There are both positive and negative prospects for the credit rating. It might be raised due to the following considerations:
We could raise the ratings following more consistent policy initiatives to strengthen the fiscal accounts or outline a more proactive reform agenda to put medium-term growth on stronger trajectory.
It may also be lowered:
We could lower the ratings following a sharp deterioration in Brazil’s external and fiscal indicators that is coupled with an unraveling of Brazil’s past commitment to pragmatic policy.
Despite the rating downgrade, S&P said that the current Brazil’s macroeconomic policy is helpful for keeping the investment-grade rating.
USD/BRL went up from 2.3113 to 2.3122 as of 22:28 GMT today following the drop to 2.3029 the lowest rate since November 26. EUR/BRL was up from 3.1847 to 3.1881.
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