February 23, 2018 / 5:36 PM / a year ago

UPDATE 1-Fitch cuts Brazil rating, cites failure to vote on pension reform

(Adds details, government, analyst comments)

By Jake Spring

BRASILIA, Feb 23 (Reuters) - Fitch Ratings cut Brazil’s credit rating further into junk territory on Friday, saying the country’s failure to put a social security overhaul to a vote undermines public finances.

The cut to BB-minus from BB, with a stable outlook, mirrors rival rating agency S&P’s downgrade in January.

Brazil’s government has put off a vote on a constitutional amendment to reform the pension system, seen as vital to shoring up the country’s finances, following a military intervention in response to violence in Rio de Janeiro state.

No constitutional amendments can be voted on during such an intervention, with the move seen as putting off any vote until after the October elections.

Fitch’s subsequent downgrade is not surprising and further downgrades are expected if there is no movement on pension reform, said Edward Glossop, Latin America economist at Capital Economics in London.

“Government officials have now essentially admitted that the pension reform is basically dead in the water,” Glossop said. “It obviously falls on the next government to reform the pension system and fix the fiscal position.”

Brazil’s benchmark Bovespa index barely reacted, trading flat at 86,662 points.

“Any downgrading in confidence is bad,” Eliseu Padilha, chief of staff to President Michel Temer, told Reuters. “However, in this case, it comes in contradiction of the Bovespa having passed 86,000 points. This is indicative of great confidence.”

Brazil’s Finance Ministry said in a statement the government remains committed to its macro and microeconomic reform agenda, although it did not mention pension reform.

The country’s sovereign debt currently has a healthy composition with low exposure to foreign exchange risk, a low concentration of maturities in the near term and a diverse investor base that reduces inherent risks, the ministry said.

Brazil lost its investment-grade rating in 2015 just as the country was heading into a two-year recession with the government of then-President Dilma Rousseff failing to rein in a ballooning budget deficit. (Reporting by Jake Spring; Additional reporting by Lisandra Paraguassu and Suhail Hassan Bhat; Editing by Arun Koyyur and Jeffrey Benkoe)

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