Fitch cuts Brazil's credit rating to junk

One of the major rating agencies in the world, Fitch ratings cut Brazil's sovereign credit rating to junk status. This is the second cut by Fitch this year after it downgraded Brazil to BBB- in October. The current downgrade left Brazil’s rating into junk territory at BB+ with a negative outlook. Fitch is the second major rating agency after Standard and Poor's (S&P) to downgrade Brazil's credit rating to junk.

The downgrade by Fitch is owing to the concern over the economic and political turmoil in Brazil. As Brazil's economy is contracting, efforts taken to improve the budget are not yielding results and efforts to impeach the president are adding to political turmoil and distracting from efforts to fix the situation.

The outlook given by Fitch is negative and more downgrades can be expected in the near future. This will prompt fear in the minds of foreign and domestic investors on selling the country's securities. Further, it will make borrowing more expensive for the government of Brazil. The Brazilian real will also remain under pressure. The downgrade reflects a very difficult time for Brazil ahead.

The rating cut will further increase pressure on President Dilma Rousseff and her economic team, who are struggling to gain support in the Congress to pass measures to raise taxes and lower spending as she herself fights impeachment efforts.

In September this year S&P downgraded rating of Brazil to BB+ from BBB- with negative outlook. The reason given by S&P were almost similar to the reasons given by Fitch. S&P also has the concern of the continuously increasing political challenges in Brazil, negative development of Brazilian real and government's struggle to shore up fiscal accounts and its faltering economy.

Further with Brazil, China is also facing economic slump in emerging economies. As compared to others the Indian economy can outperform the other emerging economies on the back of strong fundamentals and lower levels of crude oil which is the top import of India. Considering the strong fundamentals of India and the minimal impact of currency depreciation on the economy, India remains the best choice for the foreign institutional investors interested in investing in emerging economies.