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Moody’s issues warning on Brazil

Oct 3, 2013

Ratings outlook downgraded as Mantega insists ‘no change’ to growth model

Moody’s Investors Service has lowered its outlook on Brazil’s Baa2 credit rating to stable from positive, citing worsening debt and investment ratios as the economy cools.

"Even though there are signs that the Brazilian economy may be starting to recover, Moody’s view is that, if and when the upturn materializes, it is unlikely that it will be strong enough to restore a positive trend in Brazil credit metrics, a condition necessary to merit a positive outlook," the agency said in a statement.

Finance minister Guido Mantega told LatinFinance last month there would be no change to an economic policy approach a growing number of experts have blamed for exacerbating a growth slowdown.

"We are not looking at a new economic or growth model, but the continuation of an already successful growth model," Mantega said.

Former IMF fiscal affairs director Teresa Ter-Minissian told LatinFinance that without the reforms to strengthen fiscal policy while boosting investment and competitiveness "a credit downgrade [by S&P] is not only not farfetched, in fact it’s quite likely."

Standard & Poor’s in June placed Brazil’s triple-B credit rating on negative outlook, citing persistently poor GDP expansion, weaker fiscal policy and a decline in government credibility.

Moody’s pointed to Brazil’s investment-to-GDP ratio, which sank to 17.6% last year, from 20.2% in 2011. That ratio is not expected to exceed 20% during in 2013. It also cited the country’s debt-to-GDP ratio, which, at 60%, is higher than the 45% average for similarly rated sovereigns.

The agency said the two measures confirm Brazil’s economy remains in a low-growth period. It expects GDP will increase at annual rates of just over 2% in 2013 and 2014.

Moody’s in its statement also flagged poor reporting of government accounts, as well as continued government borrowings to support increased lending by public banks.

The agency would consider moving the outlook on Brazil's sovereign rating back to positive, or upgrading, if: government debt ratios declined; debt affordability, as represented by the ratio of interest payments to government revenues, improved; GDP growth rates approached trend growth of 3.5%; and if investment ratios rose materially supported by increased infrastructure spending. LF

Click here to read Brazilian finance minister Guido Mantega’s full comments



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