Tags: Moodys | Downgrade | Brazil | Rating

Moody's Threatens to Downgrade Brazil as Economy Stalls

Tuesday, 09 Sep 2014 01:19 PM

Moody's Investors Service on Tuesday warned it may cut Brazil's credit rating in the next couple of years as the economy slows down, piling pressure on whoever is elected president in October to change course on economic policy.

Brazil will go to the polls on Oct. 5 with the debate about whether to tighten fiscal policy a hot campaign topic. President Dilma Rousseff, who has indicated she won't radically alter policies if re-elected, faces a strong challenge from environmentalist Marina Silva who is keen to cut government spending.

Presidential candidate Aecio Neves, who stands third in opinion polls, said in a statement that Moody's decision is a reminder that Brazil's social and economic progress is "at risk" due to fiscal indiscipline.

Representatives for Rousseff and Silva were not immediately available to comment.

Under Rousseff, Brazil's economic growth has slowed to an average of less than 2 percent a year, with a recession taking place in the first half of 2014, while heightened government spending led to an increase in the country's debt burden.

Moody's revised the outlook on Brazil's "Baa2" rating to negative from stable, saying it could downgrade it if it sees indications that the next government will not tighten fiscal policy and if growth remains in a low range of 1 percent to 2 percent.

"Should the deterioration in the country's key credit metrics, in particular fiscal and government debt indicators, remain unchecked during the first two years of the incoming administration, this can significantly undermine Brazil's sovereign creditworthiness," Moody's said in a statement.

The firm expects Brazil's gross domestic product to expand less than 1 percent in 2014 and less than 2 percent in 2015, below a potential growth rate it estimates to be around 3 percent.

A "marked deterioration" in investor sentiment caused by "widespread market perception about the interventionist approach of the current administration" contributed to the decision, Moody's said.

Brazilian financial markets added to losses after Moody's announcement, with many analysts considering the downgrade nearly inevitable. The real last traded 0.7 percent weaker after briefly dropping more than 1 percent while the benchmark Bovespa index lost 0.8 percent.

A rating downgrade could add to Brazil's economic problems as such a move tends to increase government borrowing costs.

"The downgrade will come in the beginning of next year," said Marcos Casarin, an economist with Oxford Economics in London. "The fiscal situation will not improve until the first quarter of next year and may even worsen when we find out how deep this (fiscal) hole is."

Competing ratings firm Standard & Poor's cut Brazil's credit rating to the near junk status of "BBB-minus" in March, saying its decision reflected a combination of fiscal slippage, subdued economic growth and the prospect that no meaningful policy adjustment would occur before elections.

Fitch Ratings is the only of the big-three ratings agencies to keep a stable outlook on Brazil with a "BBB" rating, which is equivalent to Moody's "Baa2."

© 2017 Thomson/Reuters. All rights reserved.

   
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Moody's Investors Service on Tuesday warned it may cut Brazil's credit rating in the next couple of years as the economy slows down, piling pressure on whoever is elected president in October to change course on economic policy.
Moodys, Downgrade, Brazil, Rating
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2014-19-09
Tuesday, 09 Sep 2014 01:19 PM
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