Moody's says Brazil economy stuck in low growth

Reuters

* Moody's: Brazil economy growing 2.5 percent this and nextyear

* Brazil less vulnerable than other emerging economies

By Silvio Cascione

SAO PAULO, Oct 1 (Reuters) - Brazil's economy is headed fora fourth consecutive year of low growth, reducing the likelihoodof a credit upgrade, a senior analyst at Moody's InvestorsService said on Tuesday.

Still, the country remains less vulnerable to global marketinstability than other big emerging economies such as India andTurkey, which should support Brazil's rating above junk statusover the coming years, senior credit officer Mauro Leos said ata conference in Sao Paulo.

Moody's rates Brazil's sovereign credit at Baa2, two notchesabove junk status. It revised Brazil's rating to positive in2011 and, late last year, took the unusual step of delaying itsdecision on a possible upgrade by an additional year as theeconomy struggled to recover from a near recession.

Brazil's economy remains stuck in low gear, though, with agrowth forecast of just 2.5 percent for this and next year, Leossaid. This is caused by structural challenges such as lowinvestment rates and poor infrastructure, which means anypositive rating decision will require a "long-term approach" bythe government, he added.

"Four years of low trend growth: that is something to payattention to," Leos said. "It is a very long cycle and a verybad cycle."

Low growth hurts tax revenues, limiting the room forstimulus measures and potentially increasing debt over time.Some banks such as Barclays already expect a credit downgrade byone of the three main ratings agencies early next year, whichcould increase borrowing costs for Brazil's government andcompanies.

Moody's, Standard & Poor's and Fitch currently rate Brazilat the second-lowest investment grade rating, but Moody's is theonly of the three with a positive outlook on that rating, whichsignals a possible upgrade in the next couple of years.

Another risk to Brazil's credit rating is its relativelyhigh debt as a percentage of the economy, Leos said. Grossdebt-to-GDP ratio has risen over the past few years and is nowat around 60 percent, considered "high" by Moody's.

However, Brazil is less risky than other big emergingeconomies because of its low share of dollar-denominated debtand relatively low current account deficit, Leos said. Thismakes Brazil better positioned to manage risks associated withthe gradual tapering off of economic stimulus in the UnitedStates, he added.

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