Brazil paid the price for failing to approve President Michel Temer's flagship pension overhaul as S&P Global Ratings downgraded Latin America's largest economy further into junk territory.
S&P cut Brazil's debt rating to BB-, three notches below investment grade and the same as Bangladesh, Macedonia and the Dominican Republic. The outlook is stable, S&P said.
The decision marks a defeat for Finance Minister Henrique Meirelles, who late last year met officials from the three major rating companies to fend off a downgrade. Lower house speaker Rodrigo Maia in recent days criticized those responsible for the pension revamp, an indirect slight at Mr. Meirelles that raised concern Mr. Temer's unpopular measures will be further disrupted.
"This gives Meirelles and Maia the strongest argument they could have to convince lawmakers to vote pension reform and other measures to mend the budget gap," said Andre Perfeito, chief economist at Gradual Investimentos. "Let's see if they will make a lemonade out of those lemons."
Brazil's government gave up on efforts to vote on a social security reorganization in 2017 after struggling for support in Congress, kicking the bill back to this February and raising the prospect that nothing will be done about the country's ballooning pension obligations until after this year's October presidential elections.
Following a corruption scandal that undermined Mr. Temer's political capital, the government redoubled efforts to overhaul the costly pension system before lawmakers focus on campaigning. The plan was projected to save almost 400 billion reais ($124.4 billion) over 10 years by introducing a minimum age for retirement of 65 years for men and 62 years for women, among other measures.
"Despite various policy advances by the Temer administration, Brazil has made slower-than-expected progress in putting in place meaningful legislation to correct structural fiscal slippage and rising debt levels on a timely basis," S&P analyst Lisa Schineller said in a statement.
Mr. Meirelles told Bloomberg that S&P's decision reinforces the need for Brazil to pass the pension bill and measures already sent to Congress. He said he's confident that Congress will work in favor of "the reforms and the fiscal adjustment."
The nation lost S&P's investment-grade stamp in September 2015 and was further cut into junk in early 2016, a move that was followed by Moody's Investors Service and Fitch Ratings.
Brazilian financial markets oscillated last year in tandem with the changing fortunes of the pension overhaul plan. Brazil's real was little changed at 3.2163 per dollar as of 8:03 a.m. in New York Friday as the Ibovespa retreated 0.3%. The cost of insuring Brazilian bonds in the credit-default swaps market for five years decreased, while the yield on the nation's benchmark 10-year bonds rose to 4.5%.
The rating cut could also make it more expensive for Brazil to raise money in capital markets while rates are relatively low. Argentina paid 1 percentage point less this month to sell bonds than it did a year ago.
"The absence of cohesive political support for corrective economic measures that we have seen thus far diminishes the prospects for such a solid and prompt response following the 2018 elections," Ms. Schineller said.