Ratings Agency Downgrades Brazil

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, traded slightly higher Monday and is up more than 16% year-to-date even after a ratings agency lowered its rating on Brazil’s sovereign debt.

Brazil is undergoing massive reforms, including a 20-year constitutional spending cap tied to inflation, which has helped bring the economy out of a deep recession and strengthened investment confidence. The country now is working on passing pension reforms. Meanwhile, the Brazilian market is enjoying an acceleration in earnings growth.

“Brazil’s downgrade reflects its persistent and large fiscal deficits, a high and growing government debt burden and the failure to legislate reforms that would improve the structural performance of public finances,” said Fitch Ratings. “The decision of the government not to put the social security reform to a congressional vote represents an important setback in the reform agenda that undermines confidence in the medium-term trajectory of public finances and the political commitment to address the issue.”

Last week, Fitch lowered Brazil’s Long-Term Foreign Currency Issuer Default Rating (IDR) to ‘BB-‘ from ‘BB’ while revising its outlook on the country’s rating to negative from stable.

Political risks, of which Brazil is no stranger to, linger for the giant Latin American economy.