BRASILIA (Reuters) - Moody’s Investor Service says it will become more difficult to justify its “positive” outlook on Brazil’s investment-grade credit rating if the country remains in the grip of weak economic growth and its debt burden fails to decline, a senior official from the ratings agency said.
Moody’s is paying close attention to trends in the country’s debt-to-gross domestic product ratio and potential growth dynamics now that the economy risks posting a third straight year of sub-par growth, senior credit officer Mauro Leos said in a telephone interview on Monday.
“The focus is on growth and fiscal policy,” Leos said. “If there are indications that the debt-to-GDP ratio may not continue to decline as it has been the case, based on recent numbers, then it will be more difficult to support the contention that the outlook is positive.”
An outlook revision could undermine investors confidence in Brazil at a time when doubts over the sustainability of President Dilma Rousseff’s economic policies are mounting. Fellow rating company Standard and Poor’s on June 6 revised its outlook on Brazil’s “BBB” rating to negative, citing the country’s eroding fiscal and growth trends.
Rousseff has launched an offensive to regain investor confidence and says her administration is fiscally responsible.
Policymakers are gradually modifying some aspects of economic policy after implementing some mechanisms to manipulate the exchange rate, ramping up spending and allowing inflation to accelerate in order to boost growth over the past two years.
Leos declined to say if a decision to change the outlook on Brazil’s rating -- which he said could come in the second half of this year -- could drive the outlook itself to either “stable” or “negative.”
“Will the economy move toward to a lower growth environment ... or will Brazil be able to go back to growth rate closer to 4 percent?,” Leos said in an interview from New York. “That is a new element and one that we are struggling with and looking at to determine what do with the outlook.”
After expanding an average 3.6 percent over the past decade, growth in Brazil’s economy slowed to 1.8 percent since 2011 in the wake of supply bottlenecks and low levels of investment. The economy grew only 0.9 percent last year.
Central bank data show net public sector debt to GDP ratio has fallen steadily in the past decade to around 35 percent.
But Leos took into account another yard stick -- gross debt to GDP. He noted Brazil’s gross debt to GDP ratio has remained at around 60 percent in the past two years-- above the level of countries rated the same level.
The three main ratings agencies rate Brazil all at the second-lowest investment grade rating -- for Moody’s that is ”Baa2“ and the equivalent ratings for both Standard and Poor’s and Fitch is ”BBB.“.”
Moody’s is the only of the three major rating agencies to have a positive outlook for Brazil. Fitch Ratings, which has a stable outlook, is expected to end its review of Brazil’s credit rating by July, a spokeswoman for the rating agency said.
A rating downgrade by any of the world’s major rating agencies - Moody‘s, S&P and Fitch Ratings - could further upset investors already disappointed with an economy full of imbalances, growing government meddling in key sectors and rising political tension. Brazil earned investment-grade ratings for the first time in 2008.
A battery of stimulus measures implemented by Rousseff has done little to add momentum to a slow recovery with private economists estimating growth of 2.5 percent this year.
Her government’s hiking of public spending and offer of billions of dollars in tax breaks to businesses has eroded fiscal savings that many investors consider one of the main pillars of Brazil’s new-found economic stability.
Those laxer fiscal policies and lackluster growth will likely push ratings agencies to downgrade Brazil rating by one notch in early 2014, economists at Barclays wrote in a research note on Monday.
“While the government tries to be more flexible (with its macroeconomic policies) it has, at the same time, suffered with a loss in credibility,” Leos added. “The government will have to outperform for credibility to be restored.”
Editing by Guillermo Parra-Bernal and W Simon