Brazil Receives Negative Outlook

Moody's Investors Service has downgraded Brazil's issuer and bond ratings to Ba2 and changed the outlook to negative.

Several factors lead to the decision, the firm said, including the probability that the government's debt will exceed 80% of gross domestic product (GDP) within three years and political upheaval, which will further complicate fiscal consolidation efforts and delay structural reforms.

“Risks are skewed toward an even slower consolidation and recovery, or further shocks emerging, which creates uncertainty over the magnitude of deterioration of Brazil's debt profile over the rating horizon,” Moody’s said. “That deterioration is expected to continue over the coming three years, given the scale of the shock to the Brazilian economy, the lack of progress made by the government in achieving its fiscal and economic reform objectives and the political dynamics expected to persist over that period.”

The downgrade from Baa3 rating with a stable outlook—assigned in August—captures ongoing deterioration, “while the negative outlook contemplates the risks of further deterioration to Brazil's credit profile emanating from macroeconomic shocks, deeper political dysfunction or the need to support government-related entities,” Moody’s noted.

Moody’s expects GDP growth to average a negative 0.5% over the period 2016-18. “Additionally, we expect interest rates to remain elevated in real terms, which will contribute to low debt affordability with interest payments accounting for more than 20% of government revenues,” it added.

The long-term foreign currency bond ceiling was changed to Ba1, while the short-term foreign currency bond ceiling was changed to NP. The long-term foreign currency deposit ceiling was changed to Ba3, and the short-term foreign currency deposit ceiling changed to NP. The long-term local currency bond and deposit ceilings were lowered to A3.

- Diana Mota, NACM associate editor

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