Brazil’s Credit Rating Just Above Junk Status After Moody’s Downgrade

Moody’s rating agency, yesterday on August 11th, downgraded Brazil’s government bond rating to Baa3 from Baa2 (only one notch above a non-investment / speculative grade). Also the outlook on the rating has been changed from negative to stable.

Courtesy of Wikipedia

According to Bloomberg:

The company’s decision to assign a stable outlook to Brazil’s rating, now at the lowest level of investment grade, was welcomed by traders who had been widely anticipating a negative outlook. The real pared losses, futures on the Ibovespa stock gauge jumped higher, and local bonds gained.

Moody’s explained the drivers of the rating change were as follows:

1. Weaker-than expected economic performance, the related upward trend in government expenditures and lack of political consensus on fiscal reforms will prevent the authorities from achieving primary surpluses high enough to arrest and reverse the rising debt trend this year and next, and challenge their ability to do so thereafter.

2. As a result, government debt burden and debt affordability will continue to deteriorate materially in 2015 and 2016 relative to the rating agency’s prior expectations, to levels materially worse than Brazil’s Baa-rated peers. Moody’s expects the rising debt burden to stabilize only towards the end of this administration.

In Moody’s view, Brazil retains a number of credit strengths that are reflected in its Baa3 rating:

• its ability to withstand external financial shocks given ample international reserve buffers;
• a government balance sheet with relatively limited exposure to foreign currency debt and non-resident debt holdings compared with its peers;
• and a large and diversified economy.

In addition to downgrading Brazil’s government bond rating, Moody’s also downgraded:

• its senior unsecured debt rating to Baa3 from Baa2,
• and the senior unsecured shelf rating to (P)Baa3 from (P)Baa2.

The rating agency also changed Brazil’s foreign currency country ceilings as part of this rating action:

• the foreign currency bond ceiling went to Baa2 from Baa1,
• the foreign currency deposit ceiling went to Baa3 from Baa2,
• the local currency country ceilings were not affected.

Moody’s now rates Brazil in line with Turkey and India which is the same level as Standard & Poor’s. The latter rating agency downgraded Brazil in March 2014 and cut the outlook to negative in July.

Fitch Ratings grades the contry one step higher, at BBB, also with a negative outlook, Bloomberg reports.

Vice President Michel Temer warned Rousseff on Sunday that Brazil could become the next Greece if congress did not start helping the government’s austerity drive, a source said according to City AM.

It’s worth noting that Nouriel Roubini, Chairman of Roubini Global Economics, argues that rating agencies are no longer fit for purpose as they are ‘backward looking’ and have managed to escape any real scrutiny following the financial crisis, Investment Week reports.

The economist said the following:

Since the beginning of the US subprime crisis investors have been worried that credit ratings fail to adequately and effectively measure risk.

In practice, analysts at credit rating agencies follow developments in their country and then, if they think that a ratings change might be necessary, travel to the country to review the situation in more detail.

Nouriel Roubini also thinks that:

Brazil should have been downgraded below investment grade last year, as the economy struggled with a widening fiscal deficit, a growing debt burden and a weak and worsening business environment.

The establishment of an independent rating agency of the BRICs grouping of emerging economies — which comprises of Brazil, Russia, India, China, and South Africa — is being discussed at the expert level, Russian Foreign Ministry Ambassador-at-Large Vadim Lukov said in April.

The idea of establishing the BRICs rating agency — an alternative to the western ‘big three’ — was announced by the Brazilian Ambassador to Russia back in January.

Also Russia is planning to launch its own rating agency by the end of this year. The Central Bank of Russia reported, the initial capital to set it up would be around $52 million.