UPDATE 2-Fitch warns of possible Brazil downgrade as economy falters

Thu Apr 9, 2015 1:09pm EDT

UPDATE 2-Fitch warns of possible Brazil downgrade as economy falters

By Walter Brandimarte

(Reuters) – Fitch Ratings on Thursday warned it may cut Brazil’s credit rating in the next couple of years if the economy deteriorates further despite President Dilma Rousseff’s efforts to correct macroeconomic imbalances.

Fitch revised the outlook on Brazil’s BBB credit rating to negative from stable, a widely-anticipated move that put it in line with competing ratings firm Moody’s Investors Service. So far, only Standard & Poor’s has downgraded the country to BBB-minus, the edge of speculative territory.

Investors largely shrugged off Fitch’s warning, with the real gaining 0.5 percent on hopes Rousseff will find enough congressional support to pass recently announced austerity measures.

“Fitch hasn’t done anything besides positioning itself in line with other ratings agencies,” said Carlos Kawall, chief economist with J. Safra Bank in Sao Paulo. “That doesn’t change the outlook that has been causing those negative (ratings) actions.”

Fitch’s decision did not cause a stir at the Finance Ministry, either.

“It is not surprising, but we don’t think the timing is right,” said a ministry official who requested anonymity. “Brazil’s outlook has been improving with signs that reforms will be approved.”

In an attempt to safeguard Brazil’s coveted investment grade, Finance Minister Joaquim Levy has unveiled a series of spending cuts and tax hikes aimed at curbing fiscal deficits that had spiralled during Rousseff’s first term in office.

“While the government has begun a macroeconomic adjustment process to boost policy credibility and confidence, downside risks related to its effective implementation and durability persist, especially in the context of a challenging economic and political environment,” Fitch said in a statement.

A number of domestic headwinds make it extremely challenging for the government to meet its fiscal goals. A massive corruption scandal at state-run oil company Petrobras , along with a water and energy crisis, are likely to drive the economy into a recession this year.

Meanwhile, inflation remains above target, forcing the central bank to raise interest rates despite the weak economy.

Fitch said it expects Brazil’s debt burden to remain elevated in 2015 and 2016, with a general public sector deficit averaging 5 percent of gross domestic product.

Fitch believes the Brazilian economy may rebound along with business confidence in 2016 if the macroeconomic adjustment process is effectively implemented. Even so, Brazil will likely grow less than similarly-rated countries, the agency said. (Additional reporting byAlonso Soto and Marcela Ayres in Brasilia, Aurindom Mukherjee in Bengaluru; Editing by Saumyadeb Chakrabarty, Andrew Hay and W Simon)

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