Brazil moves closer to junk at Moody’s

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Brazil is on the brink of being stripped of its investment grade status by a second major ratings agency.Moody’s on Wednesday said it has placed Brazil’s Baa3 rating on review for a downgrade as the country’s economic and political crisis continue to worsen with no clear sign of an end in sight.

The agency said in a statement:

The review for downgrade is driven by i) rapidly and materially deteriorating macroeconomic and fiscal trends and diminished likelihood of trend reversal in the next 2-3 years; and ii) worsening governability conditions and increased risk of policy paralysis

Brazil has already lost its coveted investment grade at Standard & Poor’s earlier in September. But a second downgrade to junk from Moody’s would have greater market impact than the first because many pension funds and other large investors are required to sell bonds once two separate agencies rate them as speculative grade.

Fitch Ratings currently also rates Brazil at just one notch above junk.

The warning from Moody’s comes as President Dilma Rousseff battles for her political survival after her opponents began an impeachment process to remove her from office for allegedly breaking budget rules.

The high stake political drama comes as Brazil’s once high flying economy braces for its worst recession since the Great Depression, and the country struggles to rein in soaring inflation and unemployment.

With Ms Rousseff and her supporters now expected to focus on preventing the impeachment process from advancing, Moody’s warned that the fiscal adjustments and reforms that the country needs will now most likely take a backseat.

As Moody’s noted:

The likelihood of a turnaround in Brazil’s economic and fiscal performance now appears unlikely in 2016, and the key assumptions underlying our Baa3 rating — a return to GDP growth of around 2% and a primary surpluses of a similar magnitude beyond 2016 — also appear to be at risk. With political stalemate complicating the passage of fiscal adjustment measures, the likelihood that the government will be able to report primary surpluses large enough to stabilize debt ratios has diminished.

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