BRAZIL: Fitch Downgrades Brazil to `BB+` Outlook Negative

Thursday December 17 2015

On 16th December 2015, Fitch Ratings downgraded Brazil`s ratings as follows:

• Long-term foreign and local currency Issuer Default Ratings (IDRs) to `BB+` from `BBB-`, Outlook remains Negative;
• Senior unsecured foreign and local currency bonds to `BB+` from `BBB-`;
• Country Ceiling to `BBB-` from `BBB`;
• Short-term foreign currency IDR to `B` from `F3`.

Key Rating Drivers

Brazil`s downgrade reflects the economy`s deeper recession than previously anticipated, continued adverse fiscal developments and the increased political uncertainty that could further undermine the government`s capacity to effectively implement fiscal measures to stabilize the growing debt burden. The Negative Outlook highlights continued uncertainty and downside risks related to economic, fiscal and political developments. The deteriorating domestic backdrop is increasing challenges for the authorities to take timely corrective policy actions to support confidence and improve prospects for growth, fiscal consolidation and debt stabilization.

Brazil`s economic slump is not abating as highlighted by the third quarter of 2015 (3Q15) GDP figures with both consumption and investment retreating. The economy contracted by 1.7% (quarter-over-quarter [QOQ]) and 4.5% (year-over-year [YOY]) in 3Q15.

Fiscal deterioration continues against the backdrop of weaker economic conditions. In December, the government secured congressional approval for a 2% of GDP primary deficit ceiling for 2015, reflecting the adverse revenue performance, constrained ability to cut spending and potential one-time payments (of around 1% of GDP). The repeated changes in fiscal targets have undermined the credibility of fiscal policy. The weaker starting point of fiscal accounts, deeper-than- previously projected economic contraction in 2016 and increased political uncertainty in recent weeks cast further doubt on the ability of the government to secure timely legislative approval to meet its primary surplus target for 2016. Moreover, the passage of measures to structurally improve the outlook for public finances and enhance the credibility of medium term fiscal consolidation appears difficult in the current political environment.

Additionally, the recent start of impeachment proceedings against President Rousseff is adding uncertainty to an already difficult political environment and leading to continued political stalemate. The outcome of the proceedings is uncertain.

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