New York, April 09, 2018 -- Moody's Investors Service ("Moody's") has today
changed the outlook on Brazil, Government of ratings to stable from
negative. Concurrently, Moody's affirmed Brazil's
issuer and senior unsecured ratings at Ba2, and its senior unsecured
shelf ratings at (P)Ba2.
The change in the outlook on Brazil's Ba2 ratings was driven by
the following factors:
1. Moody's expectation that the next administration will
pass the fiscal reforms needed to stabilize debt metrics over the medium
term; and that,
2. Higher-than-expected short- and medium-term
growth prospects, backed by structural reforms, will support
fiscal consolidation efforts
In short, Moody's believes that the downside risks to growth
and uncertainty regarding the reform momentum that led to the assignment
of the negative outlook to the Ba2 rating in May of last year have receded.
Moody's decision to affirm the Ba2 ratings reflects credit strengths
that offset weak fiscal metrics compared to similarly rated peers.
Moderately strong economic and institutional factors are in line with
regional and Ba-rated peers, and external vulnerability is
very low. Fiscal consolidation is expected to continue.
The country ceilings remain unchanged. The long-term foreign-currency
bond ceiling remains at Ba1, while the short-term foreign-currency
bond ceiling remains unchanged at NP. The long-term foreign-currency
deposit ceiling is unchanged at Ba3, and the short-term foreign-currency
deposit ceiling is unchanged at NP. The long-term local-currency
bond and deposit ceilings remain unchanged at A3.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO STABLE FROM NEGATIVE
FIRST DRIVER: MOODY'S EXPECTATION THAT THE NEXT ADMINISTRATION
WILL PASS THE FISCAL REFORMS NEEDED TO STABILIZE DEBT METRICS OVER THE
MEDIUM TERM
Following the presidential elections in October, Moody's expects
the incoming administration to resume efforts to approve further reforms
that will be needed, in particular to social security, to
comply with the constitutionally-mandated spending ceiling.
There is consensus among political leaders that the economic and political
costs of failing to comply with the expenditure ceiling are too high to
ignore. Doing so would undermine fiscal consolidation efforts,
damage market confidence in the capacity of the country's institutions
to address its structural fiscal imbalance and, in turn, derail
the strong economic recovery now underway, putting renewed pressure
on fiscal performance.
Accordingly, Moody's expects that the next administration
will work effectively with Congress to approve a sufficiently far-reaching
social security reform to contain the increase in government mandatory
spending and assure compliance with the spending ceiling.
In consequence, while fiscal consolidation will be gradual,
it will continue, supported by expenditure savings from social security
reforms and stronger revenue stemming from a robust recovery. The
low inflation and interest rate environment will also have a positive
impact on the fiscal accounts and debt dynamics because roughly two-thirds
of the stock of government debt is inflation-linked or has floating
interest rates.
Accordingly, under the rating agency's base case scenario,
the fiscal deficit will decline gradually, from 7.8%
of GDP in 2017 to 7% of GDP in 2018-19, and the primary
balance will remain at 1.5%-2.0% of
GDP. Despite a gradual increase in the debt-to-GDP
ratio, the government's interest burden will stabilize.
Moody's projects public debt to reach 76% of GDP by 2019
and stabilize at 82% of GDP by 2022. Debt affordability
will improve, with the interest-to-revenue ratio declining
to 18% in 2017 and 16% in 2018, from a peak of 29%
in 2015.
SECOND DRIVER: HIGHER-THAN-EXPECTED SHORT-
AND MEDIUM-TERM GROWTH, BACKED BY STRUCTURAL REFORMS,
WILL SUPPORT FISCAL CONSOLIDATION EFFORTS
The rating agency expects a stronger rebound in economic activity than
previously anticipated. Over the near-term, higher
growth will provide the government with further policy space in support
of its reform efforts. Moody's projects average GDP growth
of 2.8% in 2018-19 and 2.5% in the
following years. The near-term outlook will be supported
by a pick-up in credit growth backed by an accommodative monetary
policy and solid prospects in the job market. Supported by improving
investor confidence, these elements will underpin a broad-based
recovery in domestic demand driven by both investment and consumption.
Of greater significance for Brazil's underlying economic resilience,
structural reforms approved by the Temer administration since 2016 should
support Brazil's medium-term growth prospects. A labor
reform added flexibility to contract negotiations between employees and
employers and several measures were adopted to improve the ease of doing
business with a focus on reducing red tape and regulations. The
decision to phase out subsidized lending by BNDES will improve credit
allocation and contribute to the development of domestic capital markets.
RATIONALE FOR AFFIRMING BRAZIL'S Ba2 RATINGS
Despite weak fiscal metrics, Brazil's credit profile retains
important elements of economic and institutional strength that are in
line with -- or exceed -- those of its Ba2 peers. Its
economy is large and highly diversified. External vulnerability
is very low: the flexible exchange rate regime facilitates the adjustment
of the external accounts and a large stock of foreign exchange reserves
mitigates Brazil's exposure to external shocks. Brazil's
institutions are moderately strong, as illustrated by the limited
but ongoing fiscal reform efforts, the revamping of governance for
state-owned companies as well as strong banking supervision and
regulation. The wide-ranging and ongoing Lava Jato investigations
illustrate both weakness (high-level, endemic corruption)
and strength (the proactive role of the judiciary in undertaking the investigations).
Although the high stock of government debt is a constraint on the rating,
a number of mitigating factors reduce associated credit risks relative
to peers. Chief among them are the predominance of local-currency
debt and the large domestic investor base. With foreign-currency
denominated debt accounting for less than 5% of the debt stock,
the government balance sheet is resilient to exchange rate shocks,
as witnessed during the sharp depreciation in 2015. In addition,
a significant portion of the debt stock is issued to the central bank
to implement monetary policy, with limited rollover risk to the
sovereign.
WHAT COULD MOVE THE RATINGS UP
Brazil's rating could be upgraded if Moody's were to conclude
that further structural reforms would support higher medium-term
growth rates and, consequently, faster fiscal consolidation
than currently expected. By the same token, deeper and more
rapid structural fiscal reforms than currently expected would also place
upward pressure on the rating.
WHAT COULD MOVE THE RATINGS DOWN
A re-emergence of political dysfunction and, relatedly,
stalled reform momentum that would threaten implementation of further
fiscal reforms and compliance with the spending cap -- particularly
additional delays in passing social security reform -- would put
negative pressure on the rating. Failure to pass social security
reforms would be a strong indicator of such dysfunction. Such a
scenario would also signal institutional weaknesses not already captured
in Moody's current assessment and would add further downward pressure
on the rating.
GDP per capita (PPP basis, US$): 15,238 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -3.5% (2016
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.3%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -9%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.3% (2016 Actual)
(also known as External Balance)
External debt/GDP: 37.7 (2016 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 05 April 2018, a rating committee was called to discuss the rating
of the Brazil, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals and growth
expectations have materially increased. The issuer's debt trajectory
has materially improved
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Samar Maziad
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
