Moody's cuts Brazil credit rating to junk

[RIO DE JANEIRO] Moody's became the third big agency to cut Brazil's credit rating to junk Wednesday, citing mounting debt and political instability in Latin America's biggest country.

Cutting the credit rating by two notches to Ba2, Moody's said Brazil suffered a "low growth environment," worsening debt, and "challenging political dynamics." Junk status had already been given by Fitch and S&P.

Moody's also said that it was giving the seventh biggest economy in the world a negative outlook, possibly heralding further downgrades.

"The negative outlook reflects the view that risks are skewed toward an even slower consolidation and recovery, or further shocks emerging, which creates uncertainty over the magnitude of deterioration of Brazil's debt profile over the rating horizon," Moody's said.

Brazil is in deep recession after years of growth led by high prices and strong Chinese demand for its oil, iron ore, soya and other commodities - a boom that is now firmly over. In addition, Brazil is crippled politically by gridlock in Congress and a protracted battle to impeach President Dilma Rousseff.

Brazil's economy shrank by more than three per cent last year, and the International Monetary Fund is now predicting a 3.5-per cent contraction this year. Earlier this month, Brazil's inflation rate rose to a 12-year high of 10.71 per cent.

The government said that despite the rating agencies' gloomy assessment, Brazil was working to get spending under control, increase revenues and enact reforms leading to "the recovery of the Brazilian economy in the medium term."

Although Moody's was the last of the big agencies to strip Brazil of its investment grade rating, it had already warned that the move was likely, lessening the impact on markets on Wednesday.

About mid way through trading, the Sao Paulo stock market was down 2.91 per cent.

"The downgrade will have no additional impact from an economics point of view," said Silvio Campos Neto, at Tendencias consulting in Sao Paulo. "It was not a surprise. The economic conditions are already quite negative in Brazil."

Mr Neto said Brazil would not escape the economic doldrums for at least two or three years.

AFP