By William Jones, Contributing Reporter
RIO DE JANEIRO, BRAZIL – International credit rating firm Moody’s has cut Brazil’s credit outlook from ‘positive’ to ‘stable’, despite the South American giant’s economy showing signs of a recovery over the past six months. The influential rating company maintained the country’s government bond rating at Baa2, on a par with the likes of Peru and Italy, one step below Mexico and South Africa.
According to its report, the company’s decision was led by “evidence that Brazil is going through a low growth period”, following forecasts of a little over two percent growth expected in 2013. Other factors cited were “continued borrowing to support increased lending” and “weaker debt-to-GDP and investment-to-GDP ratios.”
A failure to address fundamental issues, such as essential but lamentably slow improvements in infrastructure, were also criticized. “Low growth may reflect not just cyclical considerations, but more importantly the presence of structural problems, such as weak productivity growth and increasing unit labor costs which undermine international competitiveness.”
“Moreover, a marked deterioration in investor sentiment, as evidenced by the downward trend in the Business Confidence Index, is further limiting the ability of the Brazilian economy to return to trend growth in the near term.”
Despite the lowered outlook, which followed a similar move from Standard and Poor earlier in the year, the latest figures from the Central Bank indicate that Latin America’s biggest economy is set for growth of 2.47 percent, up from earlier estimates of 2.40 percent. The timely positive news, so soon after more pessimistic signs earlier in the year, will go some way to helping the government maintain its huge public spending program.
Despite some volatility, Brazil’s stock exchange (BOVESPA) also continues to strengthen, up 17 percent from 45 points in July to close to 53 points this week thanks to strong performers like TIM. The mobile phone operator has seen its stock rise in value by a quarter since the start of the year, whilst local competitor Oi saw a spike in share price after a merger with Portugal Telecom took a step closer to becoming a reality last week.
Reuters’ Lauren Herman told The Rio Times; “The majority of companies on the [BOVESPA] index have had positive returns over the past three months, so if Brazil’s economy is having problems, it hasn’t been reflected in stock prices recently. A chart of the index levels for the past three months shows that the trend has been downward over the past couple of weeks but is still much higher than three months ago.”
While the move by Moody’s serves as a stark reminder of the challenges that the Brazilian economy still faces as it prepares to live up to the high expectations of recent years, the change in outlook should not have too far-reaching effects. It does, however, bring the potential of a future rating downgrade closer, which would make borrowing more expensive and hit investment plans hard, something that the government will have to avert at almost any cost.