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Moody’s Lowers Brazil’s Credit Rating, But Doesn’t Anticipate a Double-Dip Recession

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Brazil’s economy is clearly growing again after a severe recession and will be shielded from a political crisis by widespread support for the government’s reform agenda, Finance Minister Henrique Meirelles said, despite the fact Moody’s on Friday announced it was lowering the country’s credit outlook.

Meirelles said the economy recovered quickly from previous episodes of political turbulence when there was no doubt about the future of economic policy.

But Moody’s Investors Service said that the corruption scandal ensnaring President Michel Temer poses a rising threat to the recovery of Latin America’s largest economy.

Moody’s reduced the nation’s outlook to negative from stable and kept its rating at two levels below investment grade at Ba2, according to a statement on Friday. That’s a notch below Turkey and Russia. Fitch Ratings and S&P Global Ratings rank Brazil at the same level.

“The risk of prolonged political uncertainty can’t be ruled out,” Moody’s analyst Samar Maziad said in a phone interview. “There’s now a risk that the reforms could be stalled.”

While the Temer administration’s ability to deliver on initial reforms came as a positive surprise, his agenda is now at risk as the odds of an impeachment or a resignation climb, according to Maziad.

That includes plans to restore the sustainability of an overburdened social security system and increase business confidence.

Moody’s expects Brazil’s economy to grow 0.5% in 2017 after falling into its worst recession in a century last year. Maziad says the recovery may be at risk amid allegations that Temer paid off a witness in the Lava Jato corruption scandal that led to the impeachment of his predecessor, Dilma Rousseff.

“This could lead to lower growth forecasts this year and next,” she said. “Still, it’s unlikely there will be a double-dip recession or contraction.”

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