Moody's warns of risks to Brazil 'stable' rating outlook from deep recession

BRASILIA, May 18 (Reuters) – Credit rating agency Moody’s on Monday warned of the growing risks to its ‘stable’ outlook on Brazil’s sovereign debt rating, noting that an even deeper recession than currently forecast could require prolonged fiscal support from the government.

Moody’s expects Latin America’s largest economy to shrink by 5.2% this year due to the coronavirus-fueled crisis, a forecast broadly in line with the market consensus and which would mark the biggest annual downturn since records began in 1900.

The risks are tilted to the downside, said Samar Maziad, Moody’s lead analyst for Brazil’s sovereign ratings. That could require more support for the economy and abort the government’s plan to resume fiscal austerity and its reform agenda next year.

“Brazil’s growth dynamics are subject to downside risks,” Maziad said in a video call with reporters on Monday. “If the fiscal deterioration becomes permanent, that would be the critical trigger for a rethink on the outlook.”

Moody’s maintained its outlook and “Ba2” credit rating on Brazil’s sovereign debt on Friday, citing three main reasons for optimism on the debt dynamics: a resumption of fiscal austerity soon; record low interest rates helping to service a record debt load; low external debt and strong foreign currency reserves.

Economy Ministry officials insist that crisis-fighting expenditures will be limited to this year only and that the government will resume its drive to get the public finances back on an even keel next year.

Emergency measures to tackle the twin health and economic crises will have an estimated 349.4 billion reais ($60 billion) impact on this year’s primary budget balance, while the overall primary budget deficit could reach 700 billion reais, or more than 9% of gross domestic product.

Maziad also noted growing political risks. President Jair Bolsonaro has lost two health ministers in a month, his popular justice minister resigned and relations with Congress are rocky.

“We are cognizant of the risks that are out there – a deeper economic contraction, political dynamics, and a possible permanent deterioration in the fiscal performance,” Maziad said.

Brazil’s “Ba2” credit rating from Moody’s is two notches below investment grade. Rival rating agencies Fitch and S&P recently lowered their outlook on Brazil. (Reporting by Jamie McGeever; editing by; Editing by Dan Grebler)

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