Moody’s Says Brazil Still Has Advantages Over Junk-Rated Nations

  • Brazil credit dynamics stronger than those of Croatia, Hungary
  • Signs of economic, fiscal strengthening will be key to Moody's

Brazil has stronger credit dynamics than lower-rated nations and an outlook for economic and fiscal recovery that would make a reduction to a junk grade unjustified, Moody’s Investors Service said.

When Moody’s gave Brazil a stable outlook after reducing its credit rating last month to Baa3, its lowest investment grade, it found that the nation has more resilience than Croatia, Hungary and Costa Rica, all rated one level down, said Mauro Leos, the agency’s lead analyst for Brazil.

While the ratio of Brazil’s debt to gross domestic product is likely to approach 70 percent by the time President Dilma Rousseff leaves office at the end of 2018, it should stabilize, and the economy will probably rebound from a contraction this year and next, Leos said. Rousseff’s surprise plan for a primary budget deficit in 2016 was already incorporated into the Moody’s view of a worsening fiscal situation that prompted the August credit downgrade, he said.

In the near term, "all the numbers are going to look pretty bad; they’re ugly, and they’re turning uglier by the minute," Leos said in an interview in Mexico City on Wednesday. Moody’s rating "has to do more with the ability to stabilize conditions -- growth, fiscal, financial conditions -- after 2016."

Moody’s cut Brazil’s rating by one level on Aug. 11 as Latin America’s biggest economy heads for its longest recession since 1931 and a bribery scandal engulfs government officials. Still, when compared to Croatia, Brazil has had better growth over the past decade, and the nation doesn’t have Hungary’s high exposure to foreign currency debt, Leos said. Both nations are rated one level below Brazil at Ba1.

"We decided that Brazil, relative to those countries that are not investment grade, still had some advantages," he said.

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