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Brazil: Moody’s places rating on review for downgrade to junk

FXStreet (Córdoba) - The rating agency Moody’s placed Brazil Baa3 under review for a downgrade. If materializes, even by only one notch, the country would lose the investment grade from Moody’s. Standard and Poor’s downgraded Brazil to junk in September. A grade below IG by two of the three rating companies could forced large liquidations of assets denominate in reals (BRL).

Despite the news, the real continued to trade in positive territory against the US dollar, but attention now turns to tomorrow’s trade in Brazil, where the real could face bearish pressure. USD/BRL moved of daily low and rose from 3.73 to 3.755, but it was still down more than 1% for the day.

Key Quotes:

“Moody's Investors Service has placed Brazil's Baa3 issuer and bond ratings on review for downgrade. The review for downgrade is driven by i) rapidly and materially deteriorating macroeconomic and fiscal trends and diminished likelihood of trend reversal in the next 2-3 years; and ii) worsening governability conditions and increased risk of policy paralysis.”

“During the review, Moody's will assess the likelihood of further deterioration in the government's fiscal position against the agency's baseline assumptions supporting the current Baa3 rating, and the prospect of a faster and more significant rise in the government's debt trajectory, in the context of heightened political uncertainty, declining investor confidence and deeper than expected recession.”

“Fiscal and economic activity indicators continue to sharply deteriorate with no clear sign of when they will bottom out. Rapidly and materially worsening macroeconomic conditions are leading Moody's to reevaluate the extent to which the fiscal and economic performance will conform to the assumptions supporting Brazil's rating at Baa3. The likelihood of a turnaround in Brazil's economic and fiscal performance now appears unlikely in 2016, and the key assumptions underlying our Baa3 rating -- a return to GDP growth of around 2% and a primary surpluses of a similar magnitude beyond 2016 -- also appear to be at risk. With political stalemate complicating the passage of fiscal adjustment measures, the likelihood that the government will be able to report primary surpluses large enough to stabilize debt ratios has diminished.”

“An upgrade is very unlikely given the review for downgrade. However, we would conclude the review with a confirmation of the rating if we expect Brazil's growth and fiscal prospects are likely to stabilize. Such an outcome would likely be associated with signs of improvements in the political stalemate that leads to the passage of fiscal reforms to reduce structural budgetary rigidities derived from revenue earmarking and mandatory growth in various spending categories. Preserving an investment-grade rating will rest on Moody's assessment of the capacity of Brazil's government to achieve its economic policy objectives and its ability to restore investor confidence.”

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