Brazil: recession, deficits and downgrades

The country is seen in a sequence of economic recession leading to fiscal deficits in the next years, putting gross debt above the 70% of GDP level and triggering rating downgrades, a sequence that the agency also cited as risk factors to further rating actions. 

"Beyond that, material contingent liabilities and pressures on international reserves are other factors that could trigger another rating downgrade, this time to non-IG. A downgrade of the Brazil sovereign rating is expected to non-IG by Moody's and/or Fitch in H1 16", says Barclays. 

Fitch would like to see political conditions materializing that would break the negative feedback loop between the political and economics crisis to avoid another rating downgrade, conditions that we believe are far from crystallizing and will likely turn the environment for fiscal accounts more acute in the first semester of next year.

Regarding Moody's, we believe that the ample space for downside surprises in the agency baseline (2% of real GDP growth and 2%/GDP of primary surplus in 2017 and 2018) will make it almost inevitable that it adjusts the sovereign's rating, also during the first semester of the next year.