Moody's Fears Brazil Economic Weakness May Extend into 2014

Thursday, 04 Jul 2013 04:53 PM

 

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Brazil's current economic weakness could extend into 2014, hurting investor and consumer confidence and eventually the country's job market, Moody's analyst Mauro Leos said on Thursday.

An extended period of poor economic performance would raise questions about Brazil's growth potential and its ability to keep reducing debt ratios, said Leos, adding that Moody's would by year-end decide whether to remove its positive outlook on Brazil's credit rating.

"That is one of the most fundamental concerns that we have about Brazil," Leos said in an interview. "If there is a real structural problem and if, from now on, maybe the reference for growth will be lower."

Lower growth expectations, Leos warned, could lead consumers to spend less and businesses to cut back on their investment plans, further slowing the economy.

Moody's, Standard & Poor's and Fitch currently rate Brazil at the second-lowest investment grade rating, but Moody's is the only of the three with a positive outlook on that rating, which signals a possible upgrade in the next couple of years.

The agency initially revised Brazil's Baa2 rating to positive in 2011 and, late last year, took the unusual step of delaying its decision on a possible upgrade by one additional year.

S&P, on the other hand, last month revised its Brazil rating outlook to negative, saying there was a one-in-three change of a downgrade in the next two years.

Leos rejected criticism that the decision by Moody's to give Brazil's rating a positive outlook was premature by saying that, at the time, the firm believed growth would pick up while interest rates would remain near historic low levels, providing the government with substantial debt service savings.

Moody's still believes Brazil's base interest rates will not return to double digits even as the central bank raises them to fight persistent inflation, Leos said.

"But if we have a new lower reference level for growth, then we have to go back to the drawing board to see if the savings in terms of lower interest rates are eaten up by lower growth on the fiscal account," Leos said. "But that is clearly not what we saw at the time."

© 2014 Thomson/Reuters. All rights reserved.

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