MercoPress. South Atlantic News Agency

Moody's presents a positive outlook for Brazil's sovereign credit profile

“Overall, external vulnerabilities have not been a source of rating constraint for Brazil's sovereign credit profile” Moody's said in a Samar Maziad report

Capital outflows from Brazilian asset markets and the Real's slide to new all-time lows against the U.S. dollar pose little threat to Brazil's sovereign credit profile, ratings agency Moody's said on Monday.

A high level of foreign exchange reserves worth 19% of gross domestic product (GDP), and solid foreign direct investment (FDI) inflows covering the expanding current account deficit offer Brazil a healthy buffer, it said.

“Overall, external vulnerabilities have not been a source of rating constraint for Brazil's sovereign credit profile,” Moody's said in a report by Senior Analyst Samar Maziad and Associate Managing Director Mauro Leos.

“External vulnerability risks are limited because the current account deficit remains entirely financed by equity FDI inflows ... and as a result, Brazil's foreign exchange reserves remain high,” they said.

Moody's has a Ba2 rating on Brazil, with a stable outlook.

Still, Moody's expects portfolio outflows to continue this year, noting Brazil's evaporating interest rate and yield advantage as official borrowing costs come down, the resulting fall in the Real, and worries over the widening current account deficit.

Moody's said it expects the current account deficit to widen to around 3% of GDP from 2.8% of GDP last year, partially driven by accelerating economic growth.

Brazil's main challenge remains getting a tighter grip on the government's finances, Moody's said. Total gross debt is close to 80% of GDP and the nominal budget deficit could reach 6.6% of GDP by next year, much higher than the respective medians around 50% and 2.8% of similarly rated countries.

Last week, Fitch Ratings poured cold water on any hopes Brazil might return to investment grade status any time soon, and said that while the economy is rebounding, there is still potential for sub-2% growth this year.