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Rating Action:

Moody's changes outlook on Brazil's ratings to stable from negative; Ba2 ratings affirmed

 The document has been translated in other languages

09 Apr 2018

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

No Related Data.
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