NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Brazil's ratings as follows:
--Long-term foreign currency (FC) Issuer Default Rating (IDR) at 'BBB';
--Long-term local currency (LC) IDR at 'BBB';
--Country Ceiling at 'BBB+'
--Short-term FC IDR at 'F2'
The Outlook is Stable.
KEY RATING DRIVERS
Brazil's ratings balance its economic diversity, a strong shock-absorption capacity underpinned by a robust external balance sheet and an adequately-capitalized banking system against structural weaknesses in its public finances, relatively high government indebtedness, low savings and investment rates and the lack of substantive reforms to improve competitiveness and fiscal flexibility.
The affirmation of Brazil's sovereign ratings reflects the following factors:
Despite the difficult domestic economic environment and the policy missteps by the authorities in recent months, Fitch believes that there are signs of policy corrections that, if sustained, could help to restore confidence and improve the consistency of economic policies. Moreover, the deterioration observed in Brazil's fiscal and external credit metrics is within the tolerance level of its current rating.
Policy uncertainty has dented business and market confidence in recent months. However, Fitch notes that recent policy adjustments including the acceleration of the pace of monetary tightening, greater fx flexibility, renewed emphasis on fiscal discipline, and steps to promote private investment in infrastructure and the oil sector are steps in the right direction and highlight the authorities commitment to maintain stability.
Brazil confronts a difficult growth-inflation trade-off. Fitch forecasts inflation to remain close to 6% by yearend and economic growth to be less dynamic than the 4.5% average during 2006-10. A combination of cyclical and structural factors underpins Brazil's extended relative economic under-performance. Fitch forecasts growth to recover to 2.5% in 2013 and increase further to 3.2% in 2014 as investment recovers gradually and consumption is supported by low unemployment, credit availability and lower inflation. However, downside risks to growth persist.
Brazil's projected general government fiscal deficits of over 3% of GDP in 2013-15 are likely to be higher than the peer median and its gross general government debt of over 55% of GDP is heavier than the 'BBB' median. Fitch's baseline debt dynamics suggests that the general government debt (%of GDP) excluding central bank's outstanding repos is likely to remain broadly stable during 2013 - 2015. Brazil's improved government debt composition, deep local capital markets, and an adequate liquidity buffer provide sufficient confidence in the ability of the Treasury to confront volatile market conditions.
Brazil's flexible exchange rate regime, ample international reserves and established tools to face BRL volatility mitigate risks related to a less favourable external environment and the expected deterioration in the current account deficit. Moreover, the current account deficit is expected to be largely financed by foreign direct investment flows. Brazil's solid net sovereign external creditor position also buttresses its external flexibility.
The Brazilian banking sector remains adequately-capitalized and credit growth decelerated in 2012 but continues to expand at around 15% so far in 2013, primarily driven by public sector banks. The growing participation of public banks in the banking system could increase the sovereign's vulnerability to contingent liabilities.
While highlighting Brazilians' demands for greater political accountability and improved social services, the recent wave protests do not presently threaten political stability or the validity of the policy framework.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.
The main factors that individually, or collectively, could trigger positive rating action include:
--A material reduction in government indebtedness;
--Progress on reforms that enhance competitiveness, improve investment prospects and place Brazil on a higher growth trajectory.
The main factors that could individually, or collectively, could trigger negative rating action include:
--A protracted economic weakness, particularly if it erodes confidence in the overall economic policy framework and places pressure on public finances;
--A material fiscal slippage leading to rising government indebtedness;
--A severe deterioration in Brazil's international reserves position and/or government debt composition.
KEY ASSUMPTIONS
Fitch assumes China (an important trading partner of Brazil) avoids a hard-landing and the Eurozone crisis doesn't escalate materially. In this environment, commodity prices may soften but remain at relatively high levels.
Fitch assumes that the US Fed exit from monetary stimulus is orderly but given the uncertain process it is likely to generate periodic bouts of market volatility. Fitch assumes that Brazil retains domestic and external market access despite higher international financial volatility.
Fitch assumes that the recent and any future protests in Brazil do not threaten overall governability.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Sovereign Rating Criteria' (Aug. 13, 2012);
--'Country Ceilings' (Aug. 13, 2012).
Applicable Criteria and Related Research:
Sovereign Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737
Country Ceilings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685029
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796951
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