The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) rose 1.7% yesterday, but that was after the largest exchange traded fund tracking Latin America’s largest economy hit another new low, one of the almost seven-year variety.
New details regarding Brazil’s tenuous grasp on an investment-grade credit rating are emerging and those details could limit the near-term upside for EWZ and rival Brazil ETFs. On Tuesday, Standard & Poor’s pared its outlook on Brazil’s rating to negative from stable. S&P did not shy away from noting that could lower Brazil’s sovereign debt rating to junk territory. The ratings agency currently rates Brazilian debt BBB-, the lowest investment grade.
“S&P affirmed Brazil’s credit rating at BBB-minus, the lowest possible investment grade rating, and could downgrade the nation over the next 12 to 18 months,” according to EmergingEquity.org. “S&P said it believes that there is a “greater than one-in-three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected.”
In February, Moody’s downgraded debt issued by Petrobras (NYSE: PBR) to Ba2, two levels below investment grade, stoking speculation regarding Brazil’s sovereign credit rating. Slack GDP estimates and a tumbling real are among the downside catalysts pressuring Brazilian stocks and EWZ. Brazil’s planning ministry attributes a major portion of the turn to the projected depreciation of about 21% in the real currency against the U.S. dollar. [Brazil ETF Slides, Bleeds Assets]