A “nosedive” in Brazil’s economy means that efforts to establish covered bonds in the country could now be viewed “in a dubious light”, according to S&P, even though it acknowledged banks’ need for improved funding, and with the development of secondary legislation said to be progressing well.

A legal framework for Brazilian covered bonds, to be called letras imobiliárias garantidas (LIGs), came into force in January 2015, and more detailed secondary legislation has since then been awaited to establish how the Brazilian product will work.

The task of defining these features was delegated to the Monetary National Council, which comprises Brazil’s central bank, the minister of finance and the minister of planning, budget and management.

A market participant close to the matter said that the development of the secondary legislation is “progressing nicely”, and said the rules could be in place by the third quarter.

In an FAQ published on Tuesday of last week, Standard & Poor’s said, however, that the Brazilian economy “has taken a nosedive” since the legislative framework was approved.

“As such, what might have once seemed like a rational move to expand bank funding might now be viewed in a dubious light,” the rating agency said.

S&P projects that Brazil’s economy will shrink by 3.6% this year, after having contracted by 3.8% in 2015. The rating agency lowered its long term foreign currency sovereign credit rating on Brazil from BB+ to BB on 17 February, with the rating outlook currently negative.

According to S&P, as of April 2016, total year-to-date withdrawals from Brazilian savings accounts reached more than R$32 billion (Eu8.01bn) – which they note is roughly 5% of the outstanding balance for savings deposits held by banks, intensifying the need to find less volatile funding sources that better match long term housing loans.

While citing the benefits of the asset class and its usefulness during the economic crisis, the rating agency said that, given the expected contraction of Brazil’s economy, “it will be interesting to monitor the impact of this new source of housing finance in that country”.