A view of the huge Complexo do Alemao shantytown urbanization as seen from Itarare aerial lift station in Rio de Janeiro, Brazil, Tuesday, Dec. 17, 2013. (Bloomberg Photo/Dado Galdieri)

Boris Korby New York

Brazil’s credit rating has been cut by Standard & Poor’s (S&P), which said sluggish economic growth and President Dilma Rousseff’s expansionary fiscal policies were fuelling an increase in debt levels.

On Monday S&P downgraded the country one step to BBB-, its lowest investment-grade rating, with a stable outlook. The new ranking is in line with Spain and the Philippines, one level below Russia and two levels below Mexico.

Brazilian bond yields have climbed 1.03 percentage points in the past year to 5.13 percent, according to JPMorgan Chase.

The move ends a decade-long stretch of upgrades for Latin America’s biggest economy. The country’s leaders have tried to fuel growth by ramping up public spending while at the same time they have sought to tame inflation by raising interest rates.

S&P said the efforts had damaged fiscal accounts and economic policy credibility. The rating firm expects growth to slow to 1.8 percent this year from 2.3 percent last year.

“I hope that it serves as a wake-up call for the government,” Ricardo Lacerda, the chief executive at São Paulo-based investment bank BR Partners and a former Goldman Sachs executive, said. “To lose the investment-grade status would be catastrophic.”

In response to the downgrade, Brazil’s finance ministry said: “The announced change is inconsistent with the solidity and the fundamentals of Brazil. Assumptions regarding trajectory of investments in Brazil aren’t justified.”

Rousseff’s administration has tried to boost growth by increasing state-subsidised lending. The country’s expansionary fiscal policy has helped keep inflation above the midpoint of the central bank’s target range of 2.5 percent to 6.5 percent since August 2010.

Rising prices have prompted policymakers to boost interest rates by 3.5 percentage points since April last year. Before that they had cut borrowing costs by 5.25 percentage points since August 2011.

Surging consumer prices and demands for better public services triggered nationwide protests last year that brought 1 million demonstrators to the streets of São Paulo and Rio de Janeiro. Rousseff is still forecast to garner 43 percent of votes and win October’s presidential election, according to an Ibope opinion poll last week.

Brazil missed its fiscal target last year as government spending outpaced revenue by the widest amount on record. The budget deficit reached 157.6 billion reais (R734bn).

Last month, the government said it would cut 44 billion reais from this year’s budget, as policymakers sought to rein in inflation and shore up fiscal management.

“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,” S&P said in a report. “These factors underscore the government’s diminished room for manoeuvre in the face of external shocks.”

S&P last upgraded the country in November 2011. The country is rated BBB by Fitch Ratings and an equivalent Baa2 by Moody’s Investors Service, which cut its outlook on the rating to stable from positive in October last year. – Bloomberg