UPDATE 1-Moody's could cut Brazil rating outlook if economy disappoints

Mon Jan 6, 2014 1:07pm EST

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By Tiago Pariz

SAO PAULO Jan 6 (Reuters) - Moody's Investors Service could cut Brazil's rating outlook later this year if the economy disappoints in the first half of 2014, Mauro Leos, the firm's senior credit analyst for Brazil, said on Monday.

If the economy performs as expected, however, Moody's will wait to decide the future of the country's rating until it can evaluate the policies of an incoming government to be elected later this year. Brazil's "Baa2" rating stands only two notches into investment grade.

"As soon as we have official data for GDP and the fiscal performance of the first six months, we should have a pretty good idea of how 2014 will look like," Leos told Reuters in an interview.

"If it is as we expect, we will wait for the elections and the new government's (economic) message. If it is weaker, we'll analyze possible changes. If it is stronger, we won't do anything."

Moody's base scenario for Brazil in 2014 includes gross domestic product growth of 2 percent and a primary budget surplus of 2 percent of GDP.

In September, Moody's reviewed the outlook for Brazil's credit rating to stable from positive. On Monday, it said in a report that a key issue for the rating is whether government officials will be able to ensure a declining path for the country's debt-to-GDP ratio, which measures a country's ability to service debt in the long term.

That ratio had been slowly declining during the past several years as Brazil remained committed to high targets for its primary budget surplus, or excess revenue over expenditure before debt payments.

But President Dilma Rousseff has lowered Brazil's primary budget target in 2013 as she granted tax breaks to boost growth. The government started the year with a goal of 3.1 percent of GDP and cut that to 2.3 percent, but will likely be able to deliver a surplus of only about 2 percent.

As a result, Brazil's debt-to-GDP ratio has been now climbing toward 60 percent and, according to Moody's, could reach 62 percent in 2014.

"The path debt-to-GDP takes will strongly influence Brazil's sovereign credit outlook," Moody's said in its report. "An important question to sovereign credit quality is whether authorities can restore conditions that will eventually lead to a declining trend in the debt ratio."

Rival ratings agencies Standard & Poor's and Fitch Ratings also have Brazil in the second-lowest investment grade rating. S&P, however, assigned a negative rating outlook to Brazil last June, which means a downgrade could happen later this year or in 2015.

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