Moody's Investors Service lowered its outlook on Brazil's government bond rating to 'negative' from 'stable', saying the country's sustained low economic growth and worsening debt metrics reflected a risk of reduced creditworthiness.
Moody's expects that Brazil's economy will continue to record low growth, and estimates that annual GDP increases are likely to remain below the country's potential of around 3% the rating agency said.
Moody's, however, affirmed its rating on Brazil's government bond at 'Baa2', citing the country's continued resilience to external financial shocks.
The Moody's announcement adds pressure on whoever is elected president in October to change course on economic policy. Brazil will go to the polls with the debate about whether to tighten fiscal policy a hot campaign topic.
President Dilma Rousseff, seeking re-election, faces a strong challenge from her main contender Marina Silva who is keen to cut government spending.
Under Ms Rousseff, Brazil’s economic growth has slowed to an average of less than 2% a year, with a recession taking place in the first half of 2014, while heightened government spending led to a increase in the country’s debt burden.
“Should the deterioration in the country’s key credit metrics, in particular fiscal and government debt indicators, remain unchecked during the first two years of the incoming administration, this can significantly undermine Brazil’s sovereign creditworthiness,” Moody’s said in a statement.
Competing ratings firm Standard & Poor’s has already cut Brazil’s credit rating to the near junk status of “BBB-minus,” saying its decision reflected a combination of fiscal slippage, subdued economic growth and the prospect that no meaningful policy adjustment would occur before next month's elections.