The FINANCIAL — In another blow to embattled President Dilma Rousseff, Moody’s Investors Service placed Brazil’s debt on review for a downgrade that would put it into junk territory, citing the country’s rapidly worsening economic and political situation, according to Nasdaq.
The move Wednesday was expected, analysts said, after statistics earlier this month showed gross domestic product shrank 4.5% in the third quarter. The shrinking economy has cut into tax revenue, causing the government budget deficit to swell. On the political front, Congress moved last week to begin impeachment proceedings against Ms. Rousseff.
“We’ve already seen significant deterioration; we don’t see how these trends can change quickly,” said Samar Maziad, Senior Sovereign Analyst at Moody’s. The review should take 30 to 90 days, Ms. Maziad said.
The president’s office declined to comment on Moody’s decision.
Moody’s also downgraded the debt of state-controlled oil company Petró leo Brasileiro SA, or Petrobras, moving it deeper into junk territory, and placed the company on review for a further downgrade.
Analysts said there is little the government can do to avoid a downgrade. The budget deficit is approaching 10% of GDP, and gross debt is on its way to hitting 70% of economic output.
Ms. Rousseff’s efforts to push austerity measures through Congress have been stymied by her low approval ratings, the result of the weak economy and a corruption scandal at Petrobras. Ms. Rousseff hasn’t been implicated in the scandal and has denied any wrongdoing on her part but her image has been tarnished by the fact that many members of her Workers’ Party are under investigation.
“You’d be dreaming if you believed (Finance Minister Joaquim Levy) can magically make changes and resolve the situation,” said Fernando Abrucio, a political-science professor at the Getulio Vargas Foundation in Sã o Paulo. The lower house of Congress “is out of control,” he added.
The congressional roadblock has worsened since last week, when the president of the lower house approved the start of impeachment proceedings. Ms. Rousseff is accused of manipulating the numbers of her government’s budget to illegally disguise its poor fiscal performance.
She has denied any wrongdoing.
Moody’s currently rates Brazil’s debt at Baa3, one notch into investment territory. A downgrade would leave the country’s bonds rated as junk, in line with Standard & Poor’s rating, and could spark heavy sales of government bonds, according to Bruno Rovai, an economist at Barclays in New York.
“We’ll see sales of fixed-income assets by funds that have rules that say they can only invest in investment-grade paper,” he said. “On the other hand, we’ll get some purchases by investors that look for high-yield assets.”
Mr. Rovai estimated that sales will outweigh purchases by about $1.6 billion.
Brazil’s financial markets, meanwhile, have responded favorably to any news that improves the odds of Ms. Rousseff being removed from office. The country’s Ibovespa stocks index closed higher Wednesday, and the real strengthened against the dollar after Ms. Rousseff’s backers lost a vote in the lower house of Congress to name members of the special committee that will investigate the charges against her.
The loss resulted in the seating of committee members seen as less favorable to her and indicated Ms. Rousseff might have less support in Congress than previously thought. Brazil’sSupreme Court temporarily suspended the panel while judges decide if the voting rules were constitutional.
“The hope for an asset price rally seems to be entirely dependent on an impeachment,” said Eric Fine, portfolio manager of the Unconstrained Emerging Markets Bond Fund at Van Eck Global, which has $195 million in assets. “You need a reset.”
Mr. Fine said he prefers bonds in Venezuela and Argentina. Brazilian credit is already trading as if there was a downgrade, he said, and some firms who are forced to sell off junk bonds have already been selling.
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