Moody's threatens to downgrade Brazil as economy stalls

RIO DE JANEIRO: Moody's Investors Service on Tuesday said it may cut Brazil's credit rating in the next couple of years as the economy slows down, putting added pressure on whoever is elected president in October to change course on economic policy.

Brazil will go to the polls on Oct. 5 with the debate about whether to tighten fiscal policy a hot campaign topic.

President Dilma Rousseff, seeking re-election, faces a strong challenge from her main contender Marina Silva who is keen to cut government spending.

Under Rousseff, Brazil's economic growth has slowed to an average of less than 2 percent a year, with a recession taking place in the first half of 2014, while heightened government spending led to a increase in the country's debt burden.

Moody's revised the outlook on Brazil's "Baa2" rating to negative from stable, saying it could downgrade it if it sees indications that the next government will not tighten fiscal policy and if growth remains in a low range of 1 percent to 2 percent.

"Should the deterioration in the country's key credit metrics, in particular fiscal and government debt indicators, remain unchecked during the first two years of the incoming administration, this can significantly undermine Brazil's sovereign creditworthiness," Moody's said in a statement.

The Brazilian real added to losses after Moody's announcement with many analysts considering the downgrade nearly inevitable.

It last traded 0.6 percent weaker after briefly dropping more than 1 percent. "The downgrade will come in the beginning of next year," said Marcos Casarin, an economist with Oxford Economics in London.

"The fiscal situation will not improve until the fist quarter of next year and may even worsen when we find out how deep is this (fiscal) hole."

Competing ratings firm Standard & Poor's has already cut Brazil's credit rating to the near junk status of "BBB-minus," saying its decision reflected a combination of fiscal slippage, subdued economic growth and the prospect that no meaningful policy adjustment would occur before elections.