The Economy

Moody’s Downgrades Brazil’s Debt to Junk

The downgrade brings Moody's in line with other rating agencies concerned about Brazil's creditworthiness amid its worst recession in decades.
Katie Kuehner-HebertFebruary 24, 2016

Moody’s Investors Service on Wednesday joined two other rating agencies in downgrading Brazil’s debt to junk as the country continues to struggle with its worst recession in decades.

Moody’s cut Brazil’s credit rating two steps to Ba2, citing the prospect of further deterioration in debt ratios as well as the risk of further external shocks. The move put Moody’s in line with Standard & Poor’s and one level below Fitch Ratings.

“Macroeconomic and fiscal developments over the next two to three years are expected to produce a materially weaker credit profile,” Moody’s said. “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.”

The country’s budget minister said last week that Brazil’s GDP would shrink 2.9% this year. Moody’s expects the economy to decline at an average rate of 0.5% a year between 2016 and 2018, with government debt likely exceeding 80% of GDP within three years amid slow progress in shoring up public accounts.

Brazil’s recession has been fueled by a rout in commodity prices and the slowdown in China, which have reduced revenue from exports including soy and iron ore. At the same time, annual inflation is running at the fastest pace in more than 12 years, limiting the central bank’s ability to lower interest rates.

According to Bloomberg, the Moody’s downgrade increases the  pressure on President Dilma Rousseff to win lawmakers’ support for measures to raise taxes and reduce spending as she fights off efforts to impeach her.

“Even though it wasn’t a surprise, it still sends a negative signal to investors,” said Arnaud Masset, an analyst at Swissquote Bank SA. “Unfortunately, Brazil’s outlook remains very cloudy as the market expects more from lawmakers than minor reforms.”

Moody’s said Brazil’s credit metrics have deteriorated “materially” in the past few months and will worsen over the next three years.

“Addressing Brazil’s fiscal challenges will require significant political will and consensus,” it predicted. “While discussion of structural reforms is a positive development, their approval by Congress will be difficult.”

4 Powerful Communication Strategies for Your Next Board Meeting