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Moody’s cuts Brazil’s government bond rating to Baa3, changes outlook to stable

August 12, 2015, 2:00 UTC+3 NEW YORK
According to the international rating agency’s forecast, Brazil’s economic growth has been even weaker than Moody's expected a year ago, and will remain so
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© AP Photo/Mark Lennihan

NEW YORK, August 12. /TASS/. Moody’s Investors Service has cut the government bond rating of Brazil by one notch to Baa3 from Baa2, but the agency altered the outlook on the rating from negative to stable, the international rating agency said in its statement.

The rating cut to Baa3, the lowest investment-grade level under Moody’s classification, follows the country’s recently weak economic achievements, the agency said.

"Weaker-than expected economic performance, the related upward trend in government expenditures and lack of political consensus on fiscal reforms will prevent the authorities from achieving primary surpluses high enough to arrest and reverse the rising debt trend this year and next, and challenge their ability to do so thereafter," the statement said.

According to the international rating agency’s forecast, Brazil’s economic "growth has been even weaker than Moody's expected a year ago, and will remain so."

"Fiscal and monetary policy tightening, along with weak consumption and investment spending, will negatively impact economic growth in 2015-16, with the expectation of a recession in 2015, a stagnant economy next year, and a gradual post-2016 recovery with GDP growth reporting annual rates of about 2% in 2017-18," the statement said.

The agency also said that its premium driver of the rationale for the downgrade: "Weak economic growth, increased government spending and a lack of political consensus will limit the authorities' ability to arrest and reverse deficit and debt trends."

Brazil is currently in full swing preparations for hosting one of the world’s most important sports events, which requires weighty financial investments. Rio de Janeiro is hosting the 2016 Summer Olympic Games on August 5-21. Last year, Brazil hosted the 2014 FIFA World Cup.

Moody’s also said in its statement that "The rating could go up, or the outlook be revised to positive, should Moody's conclude that Brazil's economic and fiscal prospects are likely to stabilize and ultimately improve faster or with greater assurance than currently expected. Such an outcome would likely be associated with fiscal reforms that reduce structural budgetary rigidities derived from revenue earmarking and mandatory growth in various spending categories."

In its review for further downgrade, the agency said that "The rating could come under additional pressure if government debt metrics were to deteriorate further and faster than Moody's expects, and if the rating agency were to conclude that Brazil was unlikely to achieve the growth and fiscal consolidation needed to ensure fiscal sustainability over the medium term."

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