BRAZIL-RATINGS/MOODYS Moody's cuts Brazil rating but says investment grade is safe

Record ID: 144248

  • Title: BRAZIL-RATINGS/MOODYS Moody's cuts Brazil rating but says investment grade is safe
  • Date: 12th August 2015
  • Summary: RIO DE JANEIRO, BRAZIL (AUGUST 12, 2015) (REUTERS) GRAPHIC ILLUSTRATING BRAZIL'S HISTORY OF FOREIGN LONG-TERM CREDIT RATINGS, SHOWING MOODY'S DOWNGRADE
  • Embargoed: 27th August 2015 13:00
  • Keywords:
  • Location: Brazil
  • Country: Brazil
  • Topics: General
  • Reuters ID: LVAE30HNBDG6QAJOHT9MVORDRE6
  • Aspect Ratio: 16:9
  • Story Text: Moody's Investors Service cut Brazil's credit rating to near-junk status on Tuesday (August 12) but said the country's coveted investment grade status is safe for now, providing some relief to investors and the government of President Dilma Rousseff.
    Moody's decision comes two weeks after competing ratings firm Standard & Poor's warned Brazil could lose its investment grade in the coming year if fallout from a number of corruption investigations further weigh on economic growth.
    In contrast, Moody's said it believes Latin America's largest economy has the ability to achieve a turn-around in growth and fiscal performance in the second half of Rousseff's four-year term, which started January 1.
    The agency said in a statement that even though Moody's expects the economic environment to remain poor and political dynamics to remain relatively unstable in 2015 and 2016, it does not currently expect so severe a deterioration in debt metrics as to threaten Brazil's investment-grade rating.
    Moody's cut Brazil's rating to Baa3, its lowest investment grade level, from Baa2. It also assigned a stable outlook to the new rating, which means it is not likely to change over the next 12-18 months.
    "It is very positive that a stable outlook was assigned to the new rating, the government is celebrating. The downgrade was expected. I have my own doubts about the government's capacity to change the situation, I don't think even Rousseff is convinced deep down, and neither is Congress, due to personal issues, and corruption investigations too, so it is not collaborating," economist and Getulio Vargas Foundation's head of research Antonio Carlos Porto Goncalves, told Reuters on Wednesday.
    Beyond Brazil's largest ever corruption scandal surrounding state-run oil company Petrobras, further clouding the economic outlook is a growing political crisis that has raised questions about Rousseff's ability to serve out her term.
    Opposition leaders have called for early elections or Rousseff's impeachment after she lost control of her political base in Congress, and Eduardo Cunha, the speaker of the lower house of Congress broke ranks with the government in late July.
    Eduardo Cunha, a leader of the PMDB party who is in charge of deciding whether to move ahead with impeachment, said he expected a legal analysis on the matter within 30 days.
    "Eduardo Cunha, who is one of those being investigated, is taking out his dissatisfaction and keeping the government in check saying that nothing is advancing etc. In the face of all of this the government is unable to do anything even if it wanted to. Deep down the executive is not wholly convinced of what it needs to do, and Congress is trying to protect itself from corruption probes. With this sort of scenario it is no surprise that Brazil's rating has been dropped, even though a stable outlook has been maintained," said Goncalves.
    Speaking on a PMDB campaign broadcast, Cunha said he was carrying out the congress's responsibility to hold the government in check.
    "Brazil is going through crisis which everyone is suffering and which the government is trying to tackle with tax adjustments. The congress has evaluated the government's capacity to lead the country according to particular criteria, which is our responsibility to do," said Cunha.
    The possibility of a downgrade has spooked politicians as well as investors as it would increase borrowing costs to the government and Brazilian companies alike.
    Finance Minister Joaquim Levy said the Moody's statement "shows the priorities that we need to have with regard to maintaining the quality of our public debt."
    Levy has been pursuing a series of spending cuts and tax hikes aimed at curbing budget deficits that had spiralled during Rousseff's first term in office.
    "Debt has to be controlled for GDP to grow, which is not happening. Debt has not been controlled and has gone up which means that investment has gone down, which means there will be less jobs in the long term. Those leaving university now know the effect this is going to have for their jobs in four years time," said Goncalves.
    Brazil needs economic growth of 2 percent coupled with a primary budget surplus of 2 percent of GDP to stabilize its debt ratios, Moody's analyst Mauro Leos said in a phone interview.
    Government revenue has plunged since the beginning of the year, however, as Brazil sinks into a deep recession expected to last through 2016.
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