Brazil's woes deepened on Wednesday as Moody's Investors Service downgraded all ratings for embattled oil group Petrobras, and the country faced the threat of losing its investment grade credit rating from the agency.
Moody's downgraded all ratings for Petrobras to Ba3 from Ba2, and placed them on review for possible further downgrade.
"These rating actions reflect Petrobras' elevated refinancing risks in the face of deteriorating industry conditions that make it more difficult to raise cash through asset sales," the agency said.
Meanwhile, after Congress opened impeachment proceedings against President Dilma Rousseff last week, Moody's said it was placing Brazil's Baa3 rating on review for downgrade, driven by a rapidly deteriorating economy and "worsening governability". The move raises fears of an investor exodus from Latin America's biggest economy.
"Fiscal and economic activity indicators continue to sharply deteriorate with no clear sign of when they will bottom out," Moody's said. "The initiation of impeachment proceedings against the president in early December . . . leaves very little chance of tackling the worsening medium-term fiscal trends."
The warning from Moody's follows moves by Standard & Poor's to cut its rating on Brazil to junk in September because of the country's deteriorating budget deficit and political turmoil.
Ms Rousseff is fighting for her political life, with the opposition in Congress seeking to impeach her for accounting tricks in the national budget that her critics say helped her to disguise deficits and win re-election last year.
There are fears that, if Brazil loses its investment grade rating from a second agency, a large number of investors will be forced to sell Brazilian foreign and domestic bonds.
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The impeachment issue comes as the Brazilian economy is locked in a downward spiral of bad news, with gross domestic product down 4.5 per cent year on year in the third quarter and inflation reaching 10.48 per cent in November against a year earlier.
The bad news on inflation is leading economists to predict that the central bank may be forced into hiking interest rates even as the economy heads into its worst recession since the Great Depression of the 1930s.
"Sticky above-target inflation may push the central bank into validating rate hikes in the first half of 2016 despite the deepening recessionary dynamics and heightened political uncertainty created by the impeachment proceedings in Congress," said Alberto Ramos, economist with Goldman Sachs, in a note.
Moody's said it no longer expected a turnround in Brazil's fiscal and economic performance next year.
This put at risk the medium-term assumptions underlying its investment grade rating of 2 per cent economic growth and primary budget surpluses — the balance excluding interest payments — of about the same magnitude.
It said the political situation made it unlikely Brazil would be able to undertake the medium-term reforms to introduce more flexibility in the budget that are needed to prevent further rises in public debt.
"This political stalemate will make it difficult to arrest government spending trends and, consequently, to reverse the rising debt trend," Moody's said.
Moody's said the Petrobras downgrade was also due to tighter financing conditions for companies in Brazil. The state-owned oil company is at the centre of a corruption investigation.