World Bulletin / News Desk

Moody's Investors Service downgraded its outlook on Brazil's government bond rating from "stable" to "negative" Tuesday, according to a company report.

The New York-based ratings agency said Brazil's "sustained low growth" and "worsening debt metrics" all contributed to a risk of reduced creditworthiness, which could "trigger a downward migration in its credit rating."

"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 percent," the ratings agency said.

The company said it expected economic growth to expand by "less than 1 percent in 2014 ... the lowest annual rate since 2009" and that next year would see growth "below the 2 percent mark."

These predictions are in line with the latest market forecasts of 0.49 percent, according to the most recent central bank Focus survey, and are less optimistic than the government's current GDP prediction of 1.8 percent. However, the government has signaled it will review this in the very near future.

According to Moody's, a sustained reduction in economic growth with "little sign of a return to potential in the near term," a "marked deterioration in investor sentiment" and "fiscal challenges" which hampered government debt from reducing were all considered drivers for the change in outlook.

The report is yet more bad news for President Dilma Rousseff, who is currently fighting for her political future as she vies for a second term in office amid a fresh corruption scandal that has threatened to send shockwaves through her ruling party.

Last week it was also announced the country was in a technical recession, after a disappointing 0.6 percent contraction was announced for the second quarter of 2014, and figures for the first quarter were revised down.

Investment grade

Rousseff has attempted to allay investors' fears that a second term would be see little or no changes to her fiscal policy, often described as interventionist. The incumbent has promised a "new government" that would in turn require a "new team," including a replacement for current finance minister Guido Mantega, whose forthcoming departure "on personal grounds" was confirmed earlier Tuesday.

The latest round of opinion polls ahead of October's general elections also suggests that Rousseff will lose to Socialist Party candidate Marina Silva, whose dramatic entry into the presidential race after the death of Eduardo Campos has upended the elections.

Despite the outlook change, Moody's said it affirmed its rating on Brazil's government bond at Baa2, which is comfortably in "investment grade" at two levels above "junk," saying that Latin America's largest economy had continued to prove resilient in the face of "external financial shocks" thanks to "international reserve buffers."

Rival ratings agency Standard & Poor's cut Brazil's sovereign debt rating in late March, leaving it just one notch above "speculative territory" at BBB-minus, and it had been expected that other agencies might follow suit.

S&P put the country's outlook on stable, meaning further downgrades were unlikely for the foreseeable future.

Conversely, Moody's had already cut the outlook in October 2013 from "positive" to "stable" and said in its report Tuesday that it would consider revising down Brazil's Baa2 rating if economic growth stagnated in the "1-2 percent range" and if "key credit metrics" were not suitably addressed in the first half of the incoming administration.

The agency also said it could put Brazil back on "stable" outlook if an "investment-led economic recovery" could be consolidated, although it admitted that any upgrading of the country's rating was "unlikely."