After S&P Ratings Reprieve, Brazil Faces Some Tough Economic News

By Jeffrey T. Lewis and Will Connors 

SÃO PAULO--President Dilma Rousseff got a big break on Monday night when Standard & Poor's Ratings Services maintained Brazil's investment-grade credit rating, but Friday's coming report on economic growth is expected to bring the embattled president more bad news.

Ms. Rousseff, who was re-elected last October, has seen her approval rating plummet, as the stagnant economy, her government's efforts to raise taxes and cut spending and a corruption scandal at state-controlled oil company Petroleo Brasileiro SA have undercut her standing with voters.

The kickbacks-and-bribery scandal at Petrobras is weighing on the Brazilian economy, S&P analysts said in a conference call on Tuesday. Earlier this week, S&P lowered its outlook for the oil company, but held back from downgrading its credit rating. Last month, Moody's Investors Service downgraded Petrobras' debt to junk status.

Petrobras is an investment powerhouse which traditionally has been responsible for about 10% of total annual business investment in the country. But the scandal has pushed the company to slash spending in that vital area. "The Petrobras story is frustrating the growth story," explained Lisa Schineller, managing director for Latin America at S&P.

Ms. Rousseff dodged a bullet with S&P's decision on Brazil's sovereign debt. A downgrade would have pushed the country's rating down into junk status, raising borrowing costs. It would also have been a blow to the president's battered prestige and to her efforts to improve the government's fiscal situation and to restore confidence in its economic policy.

S&P cited those efforts when it maintained its "BBB-" long-term foreign currency sovereign credit rating and its "A-3" short-term foreign currency rating, both with a stable outlook.

The ratings company said it expects Ms. Rousseff and Brazil's Congress to continue supporting the politically difficult austerity program proposed by Finance Minister Joaquim Levy.

Mr. Levy has announced tax increases and spending cuts, but many of the measures will require congressional approval at a time of growing tension between the president and Congress. "Clearly here key policy initiatives are being engineered," said Ms. Schineller. "We'll be looking for execution in the rest of the year."

S&P also highlighted challenges posed by the country's weak economy. Brazil's statistics agency will release on Friday its report for gross domestic product in 2014, and economists expect it to show a contraction. GDP will also shrink in 2015, by about 1%, according to a weekly survey of economists carried out by the central bank. If that comes to pass, it would mark Brazil's first back-to-back annual GDP contraction since the Great Depression.

Brazilian central bank President Alexandre Tombini echoed some of S&P's assessment about the weak economy in testimony in the country's Senate on Tuesday, saying Brazil is passing through an important and necessary adjustment and that 2015 will be a year of transition.

"The government is proposing and adopting deep and wide fiscal changes with spending cuts," he said. "This will contribute to the transition being fast" and to the benefits arriving quickly.

-- Luciana Magalhaes in São Paulo contributed to this article.

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