Moody's downgrades Brazil to near-junk status

© Brendan McDermid
International rating agency Moody's has downgraded its credit rating for Brazil to its lowest investment grade, from Baa2 to Baa3.

However, the outlook on the rating was changed to stable from negative, suggesting there will be no more changes over the next 12-18 months.
The downgrade was driven by Brazil’s weak economic growth and rising government spending.

READ MORE: Hit by poor results, HSBC quits Brazil in $5.2bn deal

"Moody's estimates that GDP growth of at least 2 percent and primary surpluses of at least 2 percent of GDP will be required to stabilize debt ratios. The rating agency does not expect Brazil to meet these conditions this year or next," the report said.

Possible stabilization is expected only toward the end of President Dilma Rousseff’s administration. A spreading corruption scandal involving state-controlled oil company Petróleo Brasileiro and the stagnant economy has led the president’s record-low approval ratings. Rousseff is also under threat of impeachment over fiscal mismanagement charges from her first term.

READ MORE: Petrobras loses $2.5bn in bribery, promises ‘recovery’

With GDP of $2.3 trillion, Brazil is the world’s seventh-largest economy. In 2011, the agency assigned Brazil a positive outlook, which was first changed to stable, and then to negative in September 2014. The official exchange rate of the Brazilian real against US dollar fell to 3.53 per dollar on August 7. The currency has lost 56 percent of its dollar value since 2011.

Moody’s report comes two weeks after Standard & Poor's warned that Brazil could lose its investment grade if the fallout from a number of corruption investigations continue to weigh on economic growth.