By Jeffrey T. Lewis And Rogerio Jelmayer
SÃO PAULO-- Moody's Investors Service downgraded its credit
rating for Brazil to one notch above junk status on Tuesday, citing
weak economic growth and rising government spending, dealing
another blow to embattled President Dilma Rousseff's political
standing.
Moody's lowered Brazil's government bond rating to Baa3 from
Baa2, and changed its outlook to stable from negative. The change
still leaves the country's ratings out of line with other countries
in a similar debt situation, but Brazil's large, diverse economy
and "low susceptibility to event risk" help justify the investment
grade level, Moody's said.
Brazil's government last month slashed a key fiscal target as it
struggles to boost tax revenue and get spending under control. It
now expects to have a primary budget surplus, which is a measure of
its ability to save and cut debt, equal to 0.15% of gross domestic
product, compared with the previous target of 1.1% of GDP.
"It will be challenging for Brazil to achieve and sustain
improving fiscal trends," Moody's said. "The numbers confirm that
the authorities have been unable to deliver primary surpluses large
enough to prevent an increase in debt ratios in 2015-2016."
The downgrade put the rating agency in line with Standard &
Poor's Ratings, which also has Brazil's rating one notch into
investment-grade territory.
Despite the downgrade, Moody's move to a stable outlook could be
considered positive, suggesting no more changes in the short
term.
"It was good that Moody's didn't cut by two notches, and has a
stable outlook. It amounts to saying that, despite the fiscal
deterioration, Brazil can still keep its investment grade," said
Jankiel Santos, chief economist at BES Investimentos do Brasil in
São Paulo.
After growing just 0.1% in 2014, Brazil's economy is expected to
contract 1.8% this year and post no growth in 2016, according to a
weekly central bank survey with economists.
The weak economy, and a spreading corruption scandal involving
state-controlled oil company Petróleo Brasileiro SA, have driven
President Rousseff's approval ratings to record lows. Her
government is now struggling to get its economic proposals passed
in Congress, and Ms. Rousseff faces a threat of impeachment over
some fiscal maneuvers from her first term.
"Whether this will cause the politicians to react and approve
the fiscal adjustment that's necessary, we'll have to wait and
see," said David Fleischer, a emeritus professor of political
science at the University of Brasília. "Because if Brazil gets
downgraded to junk, a lot of people are going to lose their
shirts."
Paulo Trevisani and Reed Johnson contributed to this
article.
Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com and Rogerio
Jelmayer at rogerio.jelmayer@wsj.com