(MENAFN- AFP) Ratings agency Moody's lowered its outlook for Brazil Tuesday, in the latest blow to President Dilma Rousseff's economic record, just weeks before voters decide if she will be re-elected.
Moody's dropped its outlook for the world's seventh largest economy from stable to negative just over a week after Brazil was declared in recession.
Now, as the country prepares to go to the polls on October 5, the US-based agency warned that "sustained low growth and worsening debt metrics" could see Brazil's credit rating cut.
Observers like financial analyst Felipe Queiroz said the downgrade reflects the failure of Brazil's macroeconomic policies.
"Inflation is high, growth low and there are no expectations of an improvement," Queiroz told AFP.
"There is also 'creative' accounting, with transfers of state firms' balance sheets to the public sphere to give a rosier picture."
- Marked deterioration -
Moody's cited sustained poor growth, forecasting "little sign of a return to potential in the near term," coupled with "a marked deterioration in investor sentiment."
The agency nonetheless confirmed a Baa2 government bond rating for Latin America's largest economy.
And it noted Brazil's "continued resilience to external financial shocks given its international reserve buffers" and its "large and diversified economy."
The finance ministry shrugged off the outlook downgrade, insisting that in the second half of the year the problems assailing a country with "a solid economy" would recede amid "a gradual recovery" through 2015.
But social democratic opposition candidate Aecio Neves, trailing a distant third in the polls, said in a statement that Moody's move shows that Brazil's economic and social gains are being put at risk by wrong economic policy decisions."
Following Moody's decision the Sao Paulo stock market ended the day at 58,676 points, having shed 0.87 percent.
Rousseff is battling to see off environmentalist rival Marina Silva, who polls show is on course to narrowly beat her in a October 26 run-off. Silva, an activist turned senator, would be Brazil's first black president.
A Tuesday poll showed a virtual dead heat, accounting for poll margins of error.
Rio University economist Margarida Gutierrez said: "There is a deterioration in macroeconomic fundamentals.
"Inflation is rising, there is no growth, the external deficit can only grow and public accounts are in a mess" to the degree that "nobody knows the size of the public deficit," he told AFP.
Moody's forecast that GDP will this year grow by less than 1.0 percent, its lowest advance since 2009, and will fall short of 2.0 percent in 2015.
Having endured four straight years of faltering growth, Brazil is now barely set to grow at all this year, with the country's Central Bank citing a rate of just 0.48 percent.
The government has itself had to halve an initial projection of 1.8 percent, blaming the global economic crisis.
GDP had by contrast soared 7.5 percent in 2010.
Moody's suggested falling investment was due to "perception about the interventionist approach of the current administration," leaving confidence indicators stuck at record lows.
Another negative factor is upward pressure on prices, with the inflation rate hovering around the 6.5 percent ceiling of the official target range.
Last October, Moody's had cut its Brazilian debt rating outlook from positive to stable.
Last March, Standard and Poor's downgraded its rating for Brazil from BBB to BBB-, just above junk status, on a worsening fiscal position and low growth two-year outlook.
- Worse to come -
Economist Andre Perfeito of Gradual Investiments observed that "whoever wins, the next president will have to apply greater fiscal discipline.
Moody's did not comment on candidates' programs, but warned that whoever forms Brazil's next administration will face "depressed economic conditions" and "persistently weak growth" which could "materially undermine its credit profile."
The agency said a sustained recovery would depend on stronger private investment and urged the poll winner to adopt "market friendly" policies to bolster investor confidence.
In a bid to reassure the market, Rousseff confirmed on Monday she would make changes to her treasury team.
She said she would replace Guido Mantega, who has served for eight years as finance minister but who has cited "personal reasons" as grounds to step down from the post.
Rousseff has not indicated who she has in mind as his replacement.
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