Brazil Sovereign Rating Raised To 'BBB', Based On Growing Ability To Withstand Global Economic Deterioration
 
The Rousseff administration of Brazil has demonstrated its commitment to meeting fiscal targets, thereby enlarging the scope for using monetary tools to influence the domestic economy.

We expect the government to pursue cautious fiscal and monetary policies that, combined with the country's growing economic resilience, should moderate the impact of potential external shocks and sustain long-term growth prospects.

We are raising our long-term foreign currency sovereign credit ratings on Brazil to 'BBB' from 'BBB-' and our long-term local currency ratings to 'A-' from 'BBB+'. The outlook is stable.
 
NEW YORK, Nov. 17, 2011--Standard & Poor's Ratings Services said today that it raised its long-term foreign currency sovereign rating on the Federative Republic of Brazil to 'BBB' from 'BBB-' and the long-term local currency rating to 'A-' from 'BBB+'.
 
At the same time, we affirmed our short-term ratings on the country, to foreign currency 'A-3' and local currency 'A-2'.
 
The outlook on the long-term ratings is stable.
 
Standard & Poor's also revised its transfer and convertibility (T&C) assessment on Brazil to 'A-' from 'BBB+'.
 
Our 'brAAA' national scale rating on Brazil remains unchanged.
 
"The upgrade of Brazil is supported by the current administration's growing track record of prudent macroeconomic policies, including fairly consistent primary surpluses of close to 3% of GDP," said Standard & Poor's credit analyst Sebastián Briozzo.
 
During the government's first year in office, fiscal results have been better than it originally budgeted for, providing greater scope for a more flexible monetary policy to play a more significant countercyclical role in moderating the negative effects of a potential decline in external demand.
 
"The combination of Brazil's sustained political commitment to cautious economic policies, its diversified economy, and its gradually improving external profile should moderate the impact of potential external shocks and sustain its long-term growth prospects, in our opinion," Mr. Briozzo added.
 
In our view, the government's response to inflationary pressures in 2011 sent an important signal about its policy flexibility and commitment to economic stability. The government tightened its fiscal policy through budget cuts and by containing increases in pension spending. As a result, the consolidated public sector primary surplus for 2011 is expected to be 3.15% of GDP.
 
Monetary and credit policies also became more restrictive in response to rising inflation. The Brazilian Central Bank increased its reference interest rate by 375 basic points between April 2010 and July 2011. As a result, GDP growth forecasts for 2011 started to decline well before signs of decelerating global growth began to affect economic expectations in Brazil.
 
Beginning in August 2011, the Central Bank began to reduce its reference interest rate and unwound some countercyclical macroprudential measures it had implemented earlier. It did so to sustain domestic demand while uncertainty about global economic growth increased. Fiscal policy, however, was not loosened.
 
Standard & Poor's expects per capita real GDP to increase by 2.1% in 2011 and 2.4% in 2012, barring an unexpectedly severe deterioration in external conditions. Under the current scenario, Brazil's net general government debt is expected to decline only gradually over the next three years from the 41% of GDP estimated for year-end 2011.
 
We expect that the current account of the balance of payments will reflect only moderate deficits of less than 2.5% of GDP in the coming three years, with net foreign direct investment inflows financing a large share of these. That, along with the accumulation of international reserves that we currently estimate as covering 10 months of current account payments, is likely to sustain Brazil's external liquidity position.
 
Brazil's relatively low ratio of investment to GDP, estimated at 19.4% for 2011, and microeconomic rigidities in many sectors hamper its ability to increase per capita real economic growth rates much above 3% without running the risk of creating macroeconomic imbalances, in our view. Given the public sector's limited, though improving, fiscal flexibility, we believe that the effort to increase private-sector investment will be a key challenge for Brazil.
 
Our local currency rating is two notches above the foreign currency rating because monetary flexibility plus the sizable local currency debt market provide, in our opinion, moderately better capacity to service debt denominated in Brazilian reais that the country issues in the domestic market.
 
Our T&C assessment reflects our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Brazil-based nonsovereign issuers for debt service is moderately lower than the likelihood of the sovereign defaulting on its foreign-currency obligations. Even though the government has some foreign-exchange restrictions, they are mostly on the capital account, and we see its economic policies as outward oriented.
 
The stable outlook balances the commitment we believe the government has to implement prudent economic policies with its relatively limited fiscal flexibility while interest rates are still high.
 
"We expect the administration will sustain its commitment to fiscal prudence despite the challenges arising from an expected strong increase in the minimum wage in 2012, and public-investment needs," said Mr. Briozzo. "We expect that fiscal policy will remain supportive of a flexible monetary policy, giving the authorities greater room to employ limited countercyclical policies amid increasingly uncertain global conditions."
 
Implementing a vigorous agenda of economic reforms that boost investment and GDP growth would give Brazil greater policy flexibility and lower real interest rates and, in turn, could lead to an upgrade.
 
Conversely, failure to contain inflation at levels that maintain the credibility of the central bank's inflation-targeting policy, combined with looser fiscal policy and greater recourse to lending by government-owned banks, could stall or potentially reverse the recent improvement in Brazil's economic pillars and result in a downgrade.