Brazil Progress On Budget Cuts Central To Rating--Moody's

CALGARY (Dow Jones)--Progress by Brazil's government on proposed spending cuts will be fundamental to determining changes in the country's credit rating outlook, Moody's Investor Services said Saturday.

Moody's, which in 2009 rated Brazil's credit rating to investment grade with a positive outlook, will decide in the second-quarter whether to change the outlook to "stable" or to put the rating in review for a possible upgrade.
In addition to considering the country's commitment to inflation targeting and Brazil's potential long-term growth rates, the ratings company will focus on what steps the government has taken to follow through on its promise to cut $30 billion from planned spending this year, Moody's senior analyst for Latin America Mauro Leos told Dow Jones Newswires.
"We will explore in the second quarter if there are sufficient elements in place to move to the next step," he said in Calgary, where he was attending the Inter-American Development Bank's annual meeting.
"At the end of the day, Brazil's fundamental issues are fiscal."
As inflation during the past 12-months climbs to 6.01% and threatens to break past the central bank's inflation target of 4.5% plus or minus 2 percentage points, the government has promised to cut 50 billion Brazilian reals ($30 billion) from planned spending this year.
But the specifics about where those cuts will come have yet to be fully divulged, with the government saying only that it won't reduce planned spending on infrastructure.
The decision on the credit rating "will be based on conversations we have with the government on how they intend to move in that direction," Leos said. "We want more detailed information about how this will happen, how will this be implemented, how soon, where they will make cuts."
While inflation concerns are important, Moody's likely won't delve too deeply on short-term inflation risks because the country has so far demonstrated its commitment to the inflation-targeting mechanism, Leos said.
Investors have accused the central bank of working too closely with the finance ministry, raising interest rates less than necessary to contain the Brazilian real's gain against the dollar. But Leos brushed off criticism of central bank president Alexandre Tombini for signaling that policy makers will try to bring inflation back to the center of the target in the longer term, instead of moving to bring rates to the center this year.
Coordination between the central bank and the finance ministry isn't necessarily negative, and represents a more balanced approach to controlling inflation and containing a strong currency, he said.
"It is clear that this coordination won't force the central bank to compromise its inflation targeting objective," he said.
-By Paulo Winterstein, Dow Jones Newswires; 55-11-3544-7073; paulo.winterstein@dowjones.com

Brazil Progress On Budget Cuts Central To Rating--Moody's
MARCH 26, 2011, 8:36 P.M. ET