Via Moody’s
New York, June 20, 2011 — Moody’s Investors Service has upgraded the government bond ratings of Brazil to Baa2 from Baa3 on account of a sovereign credit profile consistent with ratings in the higher Baa range, recent policy adjustments that should result in a more sustainable macroeconomic scenario, and prospects for improving medium-term fiscal and growth indicators. The outlook on the ratings remains positive.
RATINGS RATIONALE
The upgrade reflects the following considerations:
• Credit fundamentals consistent with ratings placed in the middle-to-upper range of the Baa rating category and moderate susceptibility to financial (credit boom-related) event risk.
• Willingness on the part of the government to reverse expansionary policies and adopt a conservative policy stance that appears more consistent with a sustainable growth path.
• Moody’s expectation that government debt ratios will report a declining trend as compliance with the fiscal targets incorporated in the medium-term budgetary guidelines are likely to be observed.
Brazil’s credit fundamentals validate sovereign ratings in the higher Baa range. High economic strength stems from large and relatively diversified productive and export bases. Policy continuity as well as a government debt structure associated with moderate exchange rate, rollover, and interest risks are integral elements of Brazil’s sovereign credit profile. Prospective elements are encouraging. Our baseline expectation is for relatively favorable and more sustained economic growth in coming years.
These credit attributes are counterbalanced by recent evidence of rapid credit growth, increased inflationary pressures and signs of overheating. Policy efforts to ward off these conditions have, to date, been effective in mitigating potential credit risks.
Through a combination of fiscal and monetary measures, the authorities are in the process of defusing conditions that have caused overheating in the economy. Although too early to tell if current actions will be sufficient, they appear strongly committed to addressing the problem and containing its impact with additional measures, if required.
The resilience of the economy to adverse shocks continues to be supported by (i) a high level of international reserves, (ii) robust bank capital ratios , and (iii) a government debt structure with limited foreign-currency exposure and reduced participation by non-residents.
A track record of effective policy management under adverse conditions provides important support to Brazil’s sovereign ratings, as well.
Budgetary guidelines that incorporate medium-term fiscal projections for the 2012-2014 period represent an important move toward a multi-year budgetary process. Compliance with a primary surplus target of 3% of GDP during the four-year term of the current administration — an assumption implicit in the current rating action — should support a declining trend in government debt ratios.
Concerns about an ongoing credit boom have dominated discussions concerning Brazil’s economic outlook in recent months. Moody’s view on this subject is that, even if a bubble-like event were to materialize, its impact on the government’s balance sheet is not likely to be substantial. This is because (a) high capital ratios in Brazilian banks provide a sturdy first-line-of-defense against any such event, significantly reducing the need for official (government) financial support, and (b) a low credit-to-GDP ratio implies that, compared to European countries that experienced credit bubbles, the potential magnitude of a systemic credit event would be considerably smaller.
TRIGGERS FOR FUTURE RATING ACTIONS
The positive outlook captures the possibility of a further upgrade within the next 12-18 months. This would be possible if: (i) economic growth moderates and remains at lower – but more sustainable – rates; and (ii) the authorities are willing and able to comply with medium-term budgetary targets.
Alternatively, if there is no evidence of substantive progress in these areas, the potential upside associated with the positive outlook could be removed, leaving Brazil’s ratings at the current Baa2 level.
The last rating action on Brazil was on September 22, 2009 when the country’s government bond rating was upgraded to Baa3 from Ba1 and a positive outlook was assigned.
The principal methodology used in this rating was “Moody’s Sovereign Bond Methodology,” published in September 2008.
“Key Drivers for Moody’s Upgrade of Brazil,” a report which offers a more detailed discussion of the reasons for the upgrade, was also published today and is available at moodys.com.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information.
Moody’s Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.
Moody’s adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody’s Investors Service’s Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody’s Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
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