Brazil Outlook Lowered to Stable by Moody’s as Growth Cools
Moody’s Investors Service lowered its outlook on Brazil’s sovereign rating to stable from positive, citing deteriorating debt and investment ratios and evidence the economy is going through a low-growth period.
“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,” Moody’s said in a statement dated Oct. 2. It affirmed Brazil’s Baa2 government bond rating, the second-lowest investment grade.
Latin America’s biggest economy expanded less than forecast by analysts in five of the past six quarters and the central bank trimmed its 2013 growth outlook to 2.5 percent from 2.7 percent this week. Brazil’s industrial production unexpectedly stalled in August as factories reduced output of consumer goods, suggesting gross domestic product will contract in the third quarter, according to Banco J. Safra SA.
President Dilma Rousseff has sought to reactivate the nation’s manufacturing sector with tax breaks for producers and consumers. Amid flagging government revenue and improved economic growth data, Rousseff has begun rolling back some incentives. Investments in production will face borrowing costs that policy makers boosted this year by more than any major economy to tame inflation.
One-month non-deliverable real forwards were little changed at 2.2081 per dollar as of 12:47 p.m. in Singapore. The real rose 1.1 percent to 2.1917 yesterday, extending last month’s 7.6 percent gain that was the biggest since October 2011 and the best among 24 emerging-market currencies tracked by Bloomberg. The currency is still down 6.4 percent this year.
The cost of protecting Brazil’s debt against default has fallen 50 basis points to 171 from a 2009 high of 221 on Aug. 21, according to CMA. The yield on Brazil’s dollar bonds due January 2023 slid 37 basis points in September, after four months of increases, and was at 4.24 percent yesterday.
“The downgrade shouldn’t have a severe impact on markets,” said Adrian Zuercher, head of emerging market strategy at Credit Suisse (Hong Kong) Ltd. “We can see Brazil has not done as bad over the last few weeks compared with other emerging markets. I’d say it’s volatile and risky but it’s not as bad as many market participants anticipated.”
Global bond yields showed investors ignored 56 percent of Moody’s and 50 percent of rival Standard & Poor’s rating and outlook changes last year, more often than not disagreeing when the companies said governments were becoming safer or more risky, data compiled by Bloomberg show.
Central bank President Alexandre Tombini said this week policy makers will work to bring the pace of consumer-price gains, which has averaged 6.4 percent so far in 2013, as close to 4.5 percent as possible next year.
Policy makers have increased Brazil’s key rate by 175 basis points since mid-April to arrest inflation that breached the upper limit of their target range twice this year. The higher cost of living has eroded consumer and business confidence, reducing economic growth.
The lowering of the outlook is “a testament to maybe some of the structural constraints on growth that Brazil currently faces because we haven’t seen enough progress on structural reforms over the last several years including investments in basic road infrastructure,” said Leif Eskesen, an economist at HSBC Holdings Plc in Singapore. “They are running a government deficit of more than 3 percent and the gross debt-to-GDP ratio has been rising.”
EBX Group Co., the holding company of former Brazilian billionaire Eike Batista, is moving out of its Rio de Janeiro headquarters into smaller offices in the city, said two people with knowledge of the move who asked not to be identified because the decision hasn’t been made public.
OGX Petroleo (OGXP3) & Gas Participacoes SA, the centerpiece of Batista’s commodities group, missed a $45 million interest payment on its 8.375 percent notes due in 2022, prompting Standard & Poor’s to assign a default rating to the company and the bonds.
Moody’s also cited the recurrent lending by the Treasury to Brazil’s public banks as well as the “deterioration in reporting quality of the government accounts” for its decision.
Brazil’s investment ratio dropped to 17.6 percent of GDP last year from 20.2 percent in 2010, the rating company said. The government debt ratio is projected to increase and will probably remain at about 60 percent of GDP, higher than the 45 percent median for Baa-rated countries, it said.
The economy will grow at an annual average of 2 percent from 2011 to 2013, according to estimates by the central bank. That is the slowest three-year mean since the 2000 to 2002 period.
“The outlook for economic growth remains weak,” Moody’s said. “Low growth may reflect not just cyclical considerations, but more importantly the presence of structural problems, such as weak productivity growth and increasing unit labor costs which undermine international competitiveness.”