Moody's downgrades Brazil to near-junk status, but raises outlook

Rating agency Moody's on Tuesday downgraded Brazil to near-junk status, cutting it from 'Baa2' to 'Baa3', but raised its outlook from negative to stable.

Traders were relieved at the assigned outlook for the rating, Moody's lowest investment grade level, as expectations were that it would remain negative.

"We have six months of breathing room with the stable outlook," André Perfeito, chief economist at Gradual Investimentos, told Folha de S.Paulo. "Our biggest fear was that Moody's had already given the country a speculative grade."

Moody's attributed the rating change to a weaker than expected economic performance, increased government spending and a lack of political consensus on fiscal reforms. The rating agency said that Brazil's debt ratios will only stabilize with GDP growth of at least 2% and a primary surplus of at least 2% of GDP. It does not expect the country to meet these conditions in 2015 or 2016, and predicts stabilization will only happen at the end of President Dilma Rousseff's administration.

While Moody's expects debt-to-GDP to rise to 67% next year and reach close to 70% in 2018, the Brazilian government said it would start to drop in 2017, going from 66.4% in 2016 to 66.3% the following year, according to Folha de S.Paulo.

Brazil cut its key fiscal target in July to 0.15% of GDP, or 8.75bn reais (US$2.61bn), compared to the previous 1.1%. The government also announced 8.6bn reais in 2015 spending cuts and slashed its 2016 primary surplus target by 1.3 percentage points to 0.7%.