The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and other Brazil exchange traded funds have been enjoying a mostly excellent 2014, but that ebullience has encountered some resistance in recent days. Investors’ willingness to stick by EWZ and Brazilian stocks in the run-up to next month’s national elections is being tested Tuesday after Moody’s Investors Service lowered its outlook on Brazil’s sovereign debt rating to negative from stable.
That news has EWZ, the largest Brazil ETF, down about 1% in midday trading, extending the ETF’s one-week plunge to 6.3%. That represents a swift change in sentiment for EWZ, which closed at $53.90 on Sept. 2, its highest close since May 2013.
The Moody’s news is not the only glum headline to impact Brazilian equities in recent days. Brazil, Latin America’s largest economy, officially fell into a recession in the first half of 2014. That should play into the hands of Brazilian Socialist Party candidate Marina Silva, but some recent polls show support firming for embattled incumbent President Dilma Rousseff. [Maybe a Big Day for Brazil ETFs]
Moody’s rating action “reflects the rising risk that sustained low growth and worsening debt metrics indicate a reduction in Brazil’s creditworthiness, which would trigger a downward migration in its credit rating,” said the ratings agency.
Moody’s expects Brazilian GDP to grow less than 1% this year, the country’s worst rate since 2009, and by just 2% in 2015.
“The primary surplus has been declining consistently since 2011. Moody’s expects government debt metrics could deteriorate further in view of declining primary surpluses in the context of low GDP growth and higher interest rates. If persistently weak growth is not reversed, this condition will further erode Brazil’s fiscal position and materially undermine its credit profile, raising the prospect of further deterioration in government debt metrics and diminution in the government’s financial strength,” added Moody’s.