New York, August 11, 2015 -- Moody's Investors Service has today downgraded Brazil's government bond
rating to Baa3 from Baa2. The rating agency also changed the outlook
on the rating to stable from negative
The drivers of the rating change are:
1. Weaker-than expected economic performance, the
related upward trend in government expenditures and lack of political
consensus on fiscal reforms will prevent the authorities from achieving
primary surpluses high enough to arrest and reverse the rising debt trend
this year and next, and challenge their ability to do so thereafter.
2. As a result, government debt burden and debt affordability
will continue to deteriorate materially in 2015 and 2016 relative to the
rating agency's prior expectations, to levels materially worse
than Brazil's Baa-rated peers. Moody's expects
the rising debt burden to stabilize only towards the end of this administration.
In Moody's view, Brazil retains a number of credit strengths
that are reflected in its Baa3 rating: its ability to withstand
external financial shocks given ample international reserve buffers;
a government balance sheet with relatively limited exposure to foreign
currency debt and non-resident debt holdings compared with its
peers; and a large and diversified economy.
In addition to downgrading Brazil's government bond rating, Moody's
also downgraded its senior unsecured debt rating to Baa3 from Baa2,
and the senior unsecured shelf rating to (P)Baa3 from (P)Baa2.
The rating agency also changed Brazil's foreign currency country ceilings
as part of this rating action. The foreign currency bond ceiling
went to Baa2 from Baa1, while the foreign currency deposit ceiling
went to Baa3 from Baa2. The local currency country ceilings were
not affected.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO Baa3
FIRST DRIVER - WEAK ECONOMIC GROWTH, INCREASED GOVERNMENT
SPENDING AND A LACK OF POLITICAL CONSENSUS WILL LIMIT THE AUTHORITIES'
ABILITY TO ARREST AND REVERSE DEFICIT AND DEBT TRENDS
It will be challenging for Brazil to achieve and sustain improving fiscal
trends. Last month the government revised its macroeconomic projections.
The numbers confirm that the authorities have been unable to deliver primary
surpluses large enough to prevent an increase in debt ratios in 2015-16,
and face significant challenges in achieving the targets set in the medium-term
fiscal program. Moody's estimates that GDP growth of at least
2% and primary surpluses of at least 2% of GDP will be required
to stabilize debt ratios. The rating agency does not expect Brazil
to meet these conditions this year or next.
Growth has been even weaker than Moody's expected a year ago,
and will remain so, in the agency's view. Fiscal and
monetary policy tightening, along with weak consumption and investment
spending, will negatively impact economic growth in 2015-16,
with the expectation of a recession in 2015, a stagnant economy
next year, and a gradual post-2016 recovery with GDP growth
reporting annual rates of about 2% in 2017-18.
Consumption has been hit by adverse labor market conditions with declining
employment and a reduction in real wages negatively affecting household
spending. Moody's expects these conditions to extend into
2016 given the lag between when labor market indicators respond and the
economic cycle. At the same time, low capacity utilization,
low business confidence, and Petrobras-related developments
will negatively affect investment prospects this year and next.
There is a lack of political consensus in Brazil over whether to more
aggressively address budgetary rigidities by pushing reforms that tackle
mandatory spending increases. This political stalemate will make
it difficult to arrest government spending trends and, consequently,
to reverse the rising debt trend during the second part of this administration.
The political arena has become increasingly complicated. Record-low
approval ratings for President Rousseff have weakened her political standing
and the legal proceedings of the Lava Jato corruption investigation have
contributed to increased tension between Congress and the Executive Branch,
further undermining the government's efforts to advance its economic agenda.
On the fiscal front, the reduction in discretionary spending has
not adequately compensated for the impact that weaker-than-expected
growth has had on government revenues. This trend will continue,
particularly in light of mandatory expenditures that continue to increase
in real terms.
During the year Congress approved several fiscal measures that have been
submitted by the government, but Moody's expects significant
opposition to a key upcoming vote on the reversal of payroll tax reductions.
A negative outcome that results in a significantly watered-down
version of the original proposal could compromise next year's fiscal
targets.
SECOND DRIVER -- DEBT METRICS TO DETERIORATE MATERIALLY RELATIVE
TO Baa-RATED PEERS
As a result, Moody's expects government debt ratios to continue
to increase over the course of this administration, remaining at
historically high levels both in absolute terms and relative to Brazil's
Baa peer group. Debt affordability will continue to decline,
in absolute terms and relative to peers.
Moody's estimates that debt-to-GDP will rise to 67%
in 2016 and continue to rise slowly thereafter, reaching close to
70% in 2018 -- in both cases significantly higher than the
53% level reached in 2013. Thereafter, the rating
agency expects debt levels to remain around that elevated level.
The interest burden will also be materially higher, with interest
payments exceeding 20% of government revenues in 2015 and 2016
compared with 16% in 2013. Moody's forecasts assume
that economic growth and the primary surplus both rise to 2% during
the second part of this administration. It would take higher growth
or a more significant fiscal correction than currently incorporated into
Brazil's revised official scenario to reverse the rising debt trajectory
before the end of this administration. Conversely, lower
growth or a lower surplus would imply that debt levels would continue
to rise beyond the end of this administration.
As a consequence, Brazil's fiscal profile will remain weaker
than that of other Baa-rated sovereigns, with debt-to-GDP
and interest-to-revenue ratios well above medians for Baa-rated
peers. Brazil's fiscal strength has been deteriorating relative
to peers for some years, and Moody's expects it to continue
to do so for the rest of this administration's term.
RATIONALE FOR THE ASSIGNMENT OF A Baa3 RATING
The assignment of a Baa3 rating reflects a balance of strengths and weaknesses.
Brazil possesses a large, diverse economy, which is a credit
strength. Despite the deterioration in credit metrics that underpins
today's action, Brazil has low susceptibility to event risk,
a comparative advantage relative to sovereign peers with Baa ratings.
The government's balance sheet has very limited foreign currency
exposure and low non-resident domestic debt holdings. Current
account deficits are manageable, being largely financed by foreign
direct investment inflows, and international reserves provide ample
coverage of external debt payments. In all of these areas,
Brazil's standing is comparable to, or stronger than,
that of several Baa- and A-rated peers.
Set against those external strengths, the government's debt
burden is high relative to Baa peers and continues to rise. Growth
is low and debt affordability is declining. Institutional strength
-- the ability of Brazil's institutions to agree and deliver
credit-supportive policy objectives -- is under pressure.
Political dynamics are damaging: the lack of political consensus
on fiscal reforms has been exacerbated by the events surrounding the Lava
Jato investigation and Petrobras-related corruption scandals.
That, in turn, has contributed to the sustained loss of investor
confidence.
At present, Brazil's strengths sufficiently protect the government's
balance sheet from shocks during the period of adjustment and recovery
for its economic and fiscal profile to continue to support an investment-grade
rating. However, much will rest on the capacity of Brazil's
institutions to achieve fiscal and monetary objectives, and its
ability to restore investor confidence and to stimulate growth.
RATIONALE FOR THE ASSIGNMENT OF A STABLE OUTLOOK
The assignment of a stable outlook reflects Moody's view that Brazil
possesses the ability to achieve a turn-around in growth and fiscal
performance. The risks of political dysfunction leading to further
economic and fiscal deterioration and the likelihood of a faster-than-expected
economic and fiscal recovery are broadly balanced. Even though
Moody's expects the economic environment to remain poor and political
dynamics to remain relatively unstable in 2015 and 2016, the rating
agency does not currently expect so severe a deterioration in debt metrics
as to threaten Brazil's investment-grade rating.
A macroeconomic environment characterized by economic contraction,
high inflation and elevated interest rates will continue to pose challenges
to the authorities this year and next. Because these conditions
reflect to a large extent cyclical factors, Moody's expects
that conditions will improve during the second part of 2016, alleviating
the pressure on government accounts. While political dynamics will
likely remain complicated on account of President Rousseff's record-low
approval ratings, which will continue to restrict the government's
ability to advance its economic agenda in Congress, Moody's
does not expect that to compromise fiscal sustainability over the medium
term.
The stable outlook also reflects Moody's view that Brazil's
overall credit profile is more closely aligned with that of Baa3 peers
than with representative Ba1-rated sovereigns.
WHAT COULD MAKE THE RATING GO UP
The rating could go up, or the outlook be revised to positive,
should Moody's conclude that Brazil's economic and fiscal
prospects are likely to stabilize and ultimately improve faster or with
greater assurance than currently expected. Such an outcome would
likely be associated with fiscal reforms that reduce structural budgetary
rigidities derived from revenue earmarking and mandatory growth in various
spending categories.
WHAT COULD MAKE THE RATING GO DOWN
The rating could come under additional pressure if government debt metrics
were to deteriorate further and faster than Moody's expects,
and if the rating agency were to conclude that Brazil was unlikely to
achieve the growth and fiscal consolidation needed to ensure fiscal sustainability
over the medium term. In Moody's view, Brazil needs
to achieve GDP growth and primary surpluses of at least 2% of GDP
during the second part of this administration to arrest the rise in debt
and provide assurance of fiscal sustainability beyond the span of this
administration. A negative outcome would likely be associated with
a collective failure on the part of Brazil's fiscal and monetary
authorities to set out and achieve clear, supportive policy objectives
coupled with a higher-than-expected level of political instability.
GDP per capita (PPP basis, US$): 16,096 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.2% (2014 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.4%
(2014 Actual)
Gen. Gov. Financial Balance/GDP: -6.7%
(2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.5% (2014 Actual)
(also known as External Balance)
External debt/GDP: 26.8% (Actual)
Level of economic development: High level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 07 August 2015, 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 materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. Other views raised included: The
issuer's susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy 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 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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 following information supplements Disclosure 10 ("Information
Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J)
of SEC Rule 17g-7") in the regulatory disclosures made at
the ratings tab on the issuer/entity page on www.moodys.com
for each credit rating:
Moody's also was paid for services other than determining a credit
rating in the most recently ended fiscal year by the person that paid
Moody's to determine this credit rating.
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.
Mauro Leos
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Alastair Wilson
MD-Global Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Brazil's rating to Baa3 from Baa2; outlook changed to stable
