Moody's lowers outlook for Brazilian economy

Indigenous Brazilians march along Paulista Avenue in Sao Paulo, Brazil on October 2, 2013, at the beginning of the National Indigenous Mobilization Week. Indigenous people from several ethnic groups take part in a protest to demand more support from the federal government.

NEW YORK CITY - Credit rating agency Moody's lowered the outlook for Brazil's debt late Wednesday because of deepening strains in the economy and the prospects of a long period of low growth.

Brazil is closely watched as one of the main emerging economies in the world, but Moody's downgraded the outlook for Brazilian government debt, rated Baa2, from positive to stable.

The agency maintained the Baa2 notation but said it could lower the outlook to negative, or even downgrade the rating, if the economy looked like growing by less than 3.0 per cent after 2014.

Other considerations would be if the central bank's key interest rate rose to 10.0 per cent or more from its current level of 9.0 per cent, and if the treasury increased lending to public sector banks, thereby raising government debt.

But Moody's said it could raise the outlook and even the notation if the burden of debt fell, if the economy achieved growth of close to 3.5 per cent and if investment increased, notably on infrastructure.

Moody's said that its latest decision to lower the outlook was based on "evidence that the economy is going through an extended low-growth period" given that the economy was expected to grow by slightly more than 2.0 per cent this year and next.

The decision also reflected a weakening of the state of public finances and borrowing by the treasury "to support increased lending by public banks."

Noting that last year it had raised the outlook for Brazil to positive, Moody's said that since then the state of the economy and of public finances had deteriorated.

"The government debt ratio is projected to increase and likely to remain at around 60 per cent of GDP (gross domestic product)," Moody's said.

This was sharply higher than the standard for Baa-rated countries of 45 per cent, it said.

The outlook for growth of just over 2.0 per cent for this year and next meant that Brazil would have shown "below-trend growth for a total of four consecutive years," Moody's commented.

"Low growth may reflect not just cyclical considerations, but more importantly the presence of structural problems, such as weak productivity growth and increased labour costs which undermine international competitiveness," Moody's said.

Although there were signs that the Brazilian economy was beginning to recover, the upturn was unlikely to be strong enough to put the outlook for Brazil's debt on a "positive trend".

However, the agency also commented that the emergence of a middle class in Brazil, while posing political challenges, was likely to be positive over the medium term.