Brazil Ratings Put Under Review for Cut to Junk by Moody’s

Brazil’s sovereign rating was put on review for a cut to junk by Moody’s Investors Service as the economy worsens and the government struggles to push through measures that would shore up the budget.

A turnaround in Brazil’s economic and fiscal performance “now appears unlikely in 2016,” Moody’s said in a statement Wednesday. Because of internal rules, some institutional investors such as pension funds can’t invest in securities labeled junk by at least two of the major rating companies, so a reduction by Moody’s after Standard & Poor’s cut its classification to sub-investment-grade in September could lead to a selloff in Brazilian assets. Fitch Ratings has the country at the lowest level of investment grade.

“Fiscal and economic activity indicators continue to sharply deteriorate with no clear sign of when they will bottom out,” Moody’s said. “With political stalemate complicating the passage of fiscal adjustment measures, the likelihood that the government will be able to report primary surpluses large enough to stabilize debt ratios has diminished.”

Moody’s cut its rating on state-controlled oil producer Petroleo Brasileiro SA one step to Ba3, citing the difficulty the company may face in refinancing its debt amid slumping crude prices, investor pessimism on Brazil and negative free cash flow. It put the rating on review for further cuts.

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