Moody's Puts Brazil's Sovereign Rating On Review Amid Increased Political And Economic Risks

In another blow to Brazil’s floundering economy, U.S. credit ratings agency Moody’s Investors Service put the country’s sovereign rating on review Wednesday, citing “worsening governability conditions and increased risk of policy paralysis.” If Moody's follows through, it would be the second ratings agency to downgrade Brazil since September.

The move comes just days after data showed that Brazil’s economy contracted 4.5 percent in the third quarter from a year earlier, and that inflation jumped to a 12-year high in November.

“Fiscal and economic activity indicators continue to sharply deteriorate with no clear sign of when they will bottom out,” Moody’s said, in a statement released Wednesday. “Rapidly and materially worsening macroeconomic conditions are leading Moody's to reevaluate the extent to which the fiscal and economic performance will conform to the assumptions supporting Brazil's rating at Baa3.”

A Baa3 rating is at the bottom of investment-grade bond ratings, and is only one grade above junk bond ratings. In September, Standard & Poor’s downgraded Brazil’s credit rating to “junk,” revoking the country’s investment-grade rating awarded in 2008.

Moody’s move adds further pressure on President Dilma Rousseff to overcome resistance in Congress to measures aimed at tackling the rapidly worsening economic and political situation. In addition to a burgeoning budget deficit, Brazil is currently reeling under a double whammy of recession and high inflation, which makes a rate cut by the country’s central bank a risky proposition.

The situation has been further muddled by the ongoing political turmoil in the country, where the country's congress opened impeachment proceedings against Rousseff last week. Rousseff is accused of manipulating figures in her government’s budget to disguise its poor fiscal performance -- a charge she has denied.

“The initiation of impeachment proceedings against the President in early December casts further doubt on the prospect of cooperation between Congress and the President to approve meaningful fiscal consolidation measures in 2016, and leaves very little chance of tackling the worsening medium-term fiscal trends,” Moody’s said, in the statement.