Moody's cuts Brazil's credit rating, keeps investment grade

Rating agency Moody's announced on Tuesday afternoon (Aug. 11) the downgrade of its credit rating for Brazil from Baa2 to Baa3, with the outlook going to stable from negative. The country is therefore still among the nations considered safe for investment, but stands just one notch above junk, a status given to nations with questionable credit quality.

Among the reasons listed by Moody's are the weaker-than-expected economic performance, surging government spending, and lack of political consensus on fiscal reforms. In the agency's view, these factors “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.”

In the statement, Moody's reports that, as for previous expectations, debt volume and solvency ratio should deteriorate even further in 2015 and 2016 to levels worse than those facing countries with a Baa rating. “Moody's expects the rising debt burden to stabilize only towards the end of this administration.”

On the other hand, the firm believes Brazil has strengths which justify a Baa3 rating—still an investment degree—namely “the ability to withstand external financial shocks given ample international reserve buffers; a government balance sheet with relatively limited exposure to foreign currency debt and non-resident debt holdings compared with its peers; and a large and diversified economy.”

Late in July, the rating company Standard and Poor's had announced a change in the outlook on Brazil's credit rating from stable to negative.

Translated by Fabrício Ferreira