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Rating Action:

Moody's affirms Brazil's Ba2 ratings; maintains stable outlook

 The document has been translated in other languages

12 Apr 2022

New York, April 12, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Brazil's long-term Ba2 issuer ratings and senior unsecured bond ratings, (P)Ba2 senior unsecured shelf ratings and maintained the stable outlook.

The key drivers of the ratings affirmation were:

1. Structural changes in fiscal and monetary policy frameworks will support economic performance and fiscal consolidation in the coming years.

2. Improving fiscal performance mitigates the impact of rising interest rates on debt dynamics.

3. Strong external position and foreign exchange reserves support Brazil's credit profile.

The stable outlook reflects Moody's expectations that recent reforms to the fiscal and monetary policy frameworks are structural in nature and will be largely preserved against the risk of fiscal slippage and weak growth impacting fiscal consolidation.

Brazil's country ceilings remain unchanged. The local-currency country ceiling is positioned four notches above the sovereign rating at Baa1, reflecting the economy's large size and diversification, and limited external imbalances and macroeconomic risks, but also the government's large footprint on the economy. One notch below, the Baa2 foreign-currency country ceiling reflects effective foreign exchange policy and large foreign exchange reserves, indicating that the risk of restrictions on transfer and convertibility in times of stress remains contained.

RATINGS RATIONALE

FIRST DRIVER - STRUCTURAL CHANGES IN FISCAL AND MONETARY POLICY FRAMEWORKS WILL SUPPORT ECONOMIC PERFORMANCE AND FISCAL CONSOLIDATION

Brazil's economy demonstrated resilience to the pandemic shock, with a strong rebound in GDP growth and improvement in fiscal metrics in 2021, as the government regained momentum in approving key fiscal and structural reforms. Moody's expects fiscal reforms to remain in place, gradually improving fiscal results and stabilizing the debt burden.

The government broadly complied with the spending ceiling last year, leading to a rapid reduction in expenditures from exceptional high levels in 2020. To ensure compliance with the ceiling, Brazil's Congress approved a constitutional amendment that will reduce spending rigidities by allowing the government to cut mandatory spending, including hiring and salary freezes, if primary spending reaches 95% of allowed spending under the ceiling.

Progress on structural reforms, including approval of central bank independence, and progress on advancing the divestment of government assets and increasing private sector participation in infrastructure investment, will improve the business environment.

Despite a strong rebound from the pandemic, with real GDP growth of 5% in 2021, Moody's expects growth to decelerate markedly in 2022 due to tightening financial conditions and weaker consumption as high inflation erodes purchasing power. In addition, relatively subdued investor confidence ahead of the presidential elections is weighing on near-term investment decisions. However, there is upside potential to growth performance in the medium term given the strong rebound in private investment in 2021 and further investment commitments for infrastructure projects in the coming years.

If the strong pick up in investment persists, it would create upside potential to GDP growth in the coming years, supported by continued reforms to boost employment, productivity and competitiveness, leading private sector investment to fill the gap in domestic demand created by the retrenchment in public sector investment since 2015.

SECOND DRIVER - IMPROVING FISCAL PERFORMANCE MITIGATES THE IMPACT OF RISING INTEREST RATES ON DEBT DYNAMICS

After exceptionally high government spending in 2020 to mitigate the impact of the pandemic on economic activity, the increase in government debt was contained, with the debt ratio declining significantly as a share of GDP at the end of 2021. At 80.3% of GDP, Brazil's government debt burden has increased around five percentage points from its 2019 level. The debt burden reached a peak of 89% of GDP in 2020 and dropped nine percentage points last year as the government resumed compliance with the spending ceiling and the economy rebounded. Moody's expects the debt burden to remain around 82% of GDP this year as a result of higher interest payments and stagnant real GDP growth. Relatively robust nominal GDP growth of around 11% in 2022 will support revenue collection and keep the increase in debt indicators contained.

In 2021, the government (Non Financial Public Sector) achieved a primary surplus of 0.75% of GDP, which contributed to a decline in the sovereign's debt burden. As of end-February, the Brazilian Treasury accumulated a sizable cash buffer, equivalent to nearly 11 months of upcoming debt-service payments. Moody's expects fiscal prudence to be maintained in the coming years, guided by adherence to the spending ceiling.

Last year's improved fiscal results has created fiscal space to accommodate the anticipated increase in interest payments without a large increase in debt levels. Between 2017 and 2021, interest rates were on a downward trajectory, improving debt dynamics and leading to a slower pace of government debt accumulation. Although this dynamic will change amid the ongoing monetary policy tightening.

Moody's projects the government interest burden will increase in 2022, reaching almost 23% of revenues, but will decrease thereafter to below 20% of revenues as monetary policy shifts to a more neutral stance later in 2023.

THIRD DRIVER - STRONG EXTERNAL POSITION AND FOREIGN EXCHANGE RESERVES SUPPORT BRAZIL'S CREDIT PROFILE

Brazil's external vulnerability is limited - a long-standing feature that supports the sovereign's credit profile. The current account deficit narrowed to 1.7% of GDP in 2021 from 3.5% in 2019. Direct investment remains robust and net direct investment is set to exceed the current account deficit in 2022. Brazil's overall external vulnerability is very low due to a strong international reserve position, which provides more than sufficient liquidity coverage to manage external financial shocks.

Foreign-currency-denominated debt accounts for less than 5% of federal government debt. The government's balance sheet is thus resilient to exchange rate shocks, and the government has limited exposure to tightening global liquidity. The bulk of federal public debt is denominated in local currency, issued domestically, and held by a diversified investor base. Domestic pension funds, financial institutions and mutual funds are the main holders of federal public debt. The share of debt held by nonresidents remains stable around 10%.

Brazil's strong external buffers and its position as commodity exporter is particularly important as a credit support factor in the current environment of tightening global liquidity and heightened risk aversion related to the Russia-Ukraine military conflict.

RATIONALE FOR STABLE OUTLOOK

The stable outlook incorporates Moody's expectations that the recent, positive changes to the fiscal and monetary policy frameworks are structural in nature and will be largely preserved, materially reducing the risk that adjustments to the spending ceiling could compromise the path of fiscal consolidation. Structural reforms are expected to encourage sustained increase in private investment and potentially raise growth rates, which have been hampered by weak infrastructure investment and productivity growth.

ESG considerations

Brazil's ESG Credit Impact Score is moderately negative (CIS-3) reflecting moderate exposure to environmental and social risks, and moderately strong institutions. Social risks are moderately negative, due to high income inequality, and exposure to environmental risk is moderately negative.

Brazil's exposure to environmental risks is moderately negative (E-3 issuer profile score) reflecting high carbon-transition risk, impacting one of its key industries; balanced against Brazil's rich natural capital and large landmass, and high economic diversification.

Exposure to social risks is moderately negative (S-3 issuer profile score), balancing broadly supportive demographic trends and a large social safety net, against high income inequality and some deficiency in the provision of basic services. Future social pressure may arise if economic growth continues to remain subdued, leading to persistent deterioration in standards of living.

The influence of governance on Brazil's credit profile is neutral-to-low (G-2 issuer profile score) reflecting the impact of relatively weak governance indicators related to corruption and rule of law. However, the country's relatively low rankings in terms of government effectiveness and control of corruption, as measured by the Worldwide Governance Indicators, understate the strength of Brazil's institutional arrangements, particularly the effectiveness of the judiciary and improving monetary policy framework.

GDP per capita (PPP basis, US$): 14,890 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -4.2% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.5% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -13.3% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.7% (2020 Actual) (also known as External Balance)

External debt/GDP: 44.1% (2020 Actual)

Economic resiliency: baa2

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 07 April 2022, 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, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The outlook on Brazil's sovereign rating could change to positive if fiscal reforms and consolidation efforts continue and prove effective in stabilizing and gradually reducing the debt burden. An improved and sustained growth performance supported by a steady rebound in private investment could also lead to a positive outlook.

Negative pressure on Brazil's credit profile would emerge in a scenario where fiscal reforms were reversed, leading to deteriorating fiscal performance and an increase in government debt, eroding fiscal strength. Persistent low growth rates would also put downward pressure on Brazil's credit profile.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Alejandro Olivo
MD-Sovereign/Sub Sovereign
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

No Related Data.
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