Moody’s cuts Brazil rating but says investment grade is safe

Moody’s downgraded South Africa in November to Baa2, its second-lowest investment grade, and changed its outlook to stable from negative.

Advertisement

Finance Minister, Joaquim Levy, told reporters Tuesday afternoon that the downgrade by Moody’s indicated the direction the country must head to improve its debt administration. 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.

In announcing the downgrade, Moody’s VP and Senior Credit Officer, Darren Kirk, stated, “Barrick has been downgraded because its leverage will remain elevated even after announced asset sales, material organic debt reduction is unlikely, and production will start declining in the next several years”.

Combined, these three factors will prevent Brazil from achieving primary surpluses high enough to reverse projected deterioration in debt-to-GDP in 2015 and 2016.

Soon after the decision announcement, Levy emphasized that Moody’s clearly indicated what the country needs to do in order to avoid losing its investmment grade. The downgrade was broadly expected to take place this month, nearly a year after the change in outlook last September and following a recent field trip from the agency’s analysts team.

Advertisement

“It was good that Moody’s didn’t cut by two notches, and has a stable outlook”. The financial relief comes after some of the company’s bonds were raised to “investment grade” by Moody’s Investors Service Inc. At the time it said that the rating was a reflection of weak economic growth prospects due to constraints such as infrastructure and other issues. “Because if Brazil gets downgraded to junk, a lot of people are going to lose their shirts”.

Enlarge This Image