Brazil's economic prospects are improving, however recovery will be difficult, U.S. credit rating agency Moody's said on Tuesday.

The rating agency predicted that Brazil's economy will contract 3.5 percent in the current year, which will mean its second negative year in a row, while the agency expects a 0.5 percent recovery for 2017.

"The conclusion of the impeachment process (against former Brazilian president Dilma Rousseff) allowed (Michel) Temer's administration to seek policies for combating reliable inflation, as well as measures to strengthen fiscal discipline," said Moody's.

The credit rating agency said that the measures proposed by the government "are vital in alleviating investors worries and maintaining capital flows, as well as strengthening confidence."

However, the forecasts relating to Brazil's economic performance are slightly less optimistic than those from the financial market which predicted a 3.14 percent contraction this year and a 1.3 percent growth in 2017.

At the same time, Brazil's central bank predicted a 3.3 percent regression at the end of 2016 and also a 1.3 percent growth for 2017.

"The stabilization of economic conditions will help to contain the financial stress on Brazilian companies and will aid modest improvements in corporate performance," wrote Moody's in its report.

The report said "restrictive liquidity conditions, high interest rates and unemployment will continue to weigh down on the (Brazilian) economy, at least until the end of 2017." Enditem

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