• Situation not as bad as downgraded countries including Croatia
  • Moody's sees weak fiscal accounts and recession in 2015, 2016

The deterioration in Brazil’s economic and political outlook isn’t enough to strip the country of its investment grade, Moody’s Investors Service senior analyst Mauro Leos said.

“There are clear weaknesses facing Brazil, but they’re not as bad as those that we saw when we downgraded other countries,” Leos said Tuesday at a Council of the Americas conference in New York.

Moody’s, which rates the country at the lowest investment grade, expects the economic contraction in Brazil to weaken fiscal accounts and increase debt ratios this year and next. The recession and a corruption investigation at the state-controlled oil company have sapped investor confidence in President Dilma Rousseff’s ability to shore up the country’s finances. The deterioration has sent the currency to a record low and prompted Standard & Poor’s to downgrade the country to junk on Sept. 9 with a negative outlook.

Moody’s cut Brazil to Baa3 with a stable outlook on Aug. 11. Still, Brazil is in a better situation than countries that have lost their investment grade in the past few years, such as Croatia and Hungary, Leos said.

Croatia, which has seen its economy contract every year since 2009, saw debt-to-gross-domestic-product ratios triple in the past eight years to more than 100 percent, Leos said. Brazil’s stands below 70 percent, and it has strong reserves with a relatively small amount of foreign-currency debt, he said.

Brazil has 3 dollars of backing for every dollar the country has to pay in debt, according to Leos. Hungary-- which lost its investment grade rating in 2011 -- has 75 cents per dollar.

The ratings company will monitor a vote in Brazil’s Congress on Tuesday to overturn spending vetoes, which could boost outlays and further erode fiscal accounts, and how the government works to close the gap on its 2016 budget, Leos said.

Moody’s isn’t considering the possibility of impeachment on its base-case scenario, but the event wouldn’t be "credit positive," according to Leos.

"The business community -- and by that I mean the Brazilian business community and international business community -- they are looking for signs that there is a will and ability to reach consensus” between lawmakers and Rousseff, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE