14/11/2019 Press Release

Fitch Affirms Brazil at 'BB-'; Outlook Stable

Fitch Ratings - New York - 14 November 2019:

Fitch Ratings has affirmed Brazil's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB-'. The
Rating Outlook is Stable.

RATING ACTIONS
ENTITY/DEBT RATING PRIOR
LT IDR
Brazil BB- BB-
Affirmed
ST IDR
B B
Affirmed
LC LT IDR
BB- BB-
Affirmed
LC ST IDR
B B
Affirmed
Country Ceiling
BB BB
Affirmed
LT
senior
BB- BB-
unsecured
Affirmed

Key Rating Drivers

Brazil's rating are constrained by high and rising government indebtedness, a rigid fiscal structure, weak
economic growth potential and a difficult political landscape, including a fragmented congress and
corruption related issues that hamper timely progress on fiscal and economic reforms. The ratings are
supported by Brazil's large and diverse economy, high per capita income relative to peers and a capacity to
absorb external shocks underpinned by its flexible exchange rate, low external imbalances, robust
international reserves and deep domestic government debt markets.

The Brazilian congress recently passed the long-awaited and much-needed social security reform (SSR),
with savings (relative to a non-reform scenario) of around BRL800 billion (around 11% of projected 2019
GDP) over the next 10 years (mostly back-loaded). Some progress has also been made on disinvestment,
with Petrobras and certain public sector banks implementing asset sales in recent months.

Nevertheless, Brazil's general government debt burden is high, at around 79% of GDP in 2019 (current BB
median: 46.7%), and is forecast by Fitch to continue rising over the next decade. Fitch estimates it will likely
require an improvement in the in the primary budget balance of around 3pp of GDP to stabilize government
debt/GDP, which could be challenging in the current environment of weak growth performance and divided

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politics, unless there is an increase in trend growth or a lasting downward shift in government borrowing
costs.

Fitch estimates the general government (GG) budget deficit to decline to just below 7% of GDP in 2019, but
remain relatively high compared to the current 'BB' median of 3% of GDP. This year's primary deficit
outcome is expected to be better than the target, mainly due to the non-recurrent revenues stemming from
the transfer-of-rights oil auctions held on November 6. Fitch forecasts that average GG deficits to be just
over 6% of GDP in 2020-2021, reflecting a gradual fiscal consolidation pace. Fiscal outcomes could be
better than Fitch's forecasts should material non-recurrent revenues emerge, although this would not
represent a structural improvement in public finances.

Fitch's 2020 fiscal forecasts are in line with the budget, which targets a public sector primary deficit target of
1.6% of GDP, and envisions no real growth in the minimum wage (to which significant part of pension and
other social spending is tied) and public sector wage and hiring restraint. Additional spending reforms, such
as the ones being proposed and in the pipeline (see below), will be required to improve prospects for
continued compliance with the spending cap and create more room for discretionary spending, which has
been cut to historically low levels. Despite the passage of the SSR, pension pressures will continue to lift
mandatory spending and the deficit of the social security system for private sector workers is expected to
remain around 3% of GDP in 2020.

Fitch forecasts GG debt to surpass 80% of GDP in 2020, although the pace of the upward trajectory is
slower than seen in recent years. Medium-term debt dynamics could benefit from faster repayments to the
Treasury on loans to BNDES or the materialization of other non-recurrent revenues. The government
finances itself largely on the domestic market in local currency and its borrowing costs are currently
benefiting from the central bank's interest rate cuts and the downward shift and flattening of the yield curve
from a year ago.

On the positive side, the government has recently proposed a package of constitutional reforms, called
"More Brazil Plan" to improve fiscal management, reduce budgetary rigidities, and redesign the fiscal
relationship between the federal and local governments. The reform also introduces the possibility of some
automatic spending adjustments for the federal government and states under certain conditions which could
facilitate expenditure savings. Institutional improvements include the creation of a fiscal council of the
Republic to foster greater fiscal responsibility and improve the monitoring and coordination of fiscal risks.
Additional reforms are in the pipeline including an administrative reform to restructure public sector careers
and a tax reform aimed at simplifying the complex system.

However, many of these proposals involve changes to the constitution, and dilution, delays and shelving of
certain reforms cannot be ruled out. The outlook for continued legislative-executive cooperation on reforms
is unclear while the relative prioritization and sequencing of reforms can shift. The Bolsonaro
administration's lack of a stable and reliable base in congress can make reforms difficult and time
consuming, especially those requiring constitutional amendments. The local elections in October 2020 could
also shorten the window for reforms. Finally, the reform outlook could also suffer should the economy
underperform in the coming months.

Brazil's economy remains sluggish, with Fitch forecasting economic growth of 0.8% and 2% in 2019 and
2020, respectively (which is below the forecast 3% and 3.2% for the current BB median for the respective
years). This year, growth has been hurt by a combination of external headwinds (such as Argentina's
economic crisis and the US-China trade war) and domestic factors. High unemployment, fiscal and quasi
fiscal policy restraint, and transitory factors like the Vale dam collapse have weighed on growth. A gradual
recovery next year will be underpinned by the ongoing monetary policy easing and the fading of some
transitory shocks. The progress of reforms will be crucial to encourage greater recovery in confidence and
improve investment prospects in 2020 and 2021. Fitch forecasts growth of 2.5% in 2021.

Brazil's macroeconomic stability is supported by low inflation and moderate current account deficits.
Consumer price inflation (IPCA) rate reached 2.5% in October and is below the target of 4.25%, while
inflation expectations remain well-anchored around the targets of 4% and 3.75% for 2020 and 2021,

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respectively. Subdued inflation, sluggish growth, and progress on the SSR in congress along with a more
accommodative global monetary policy backdrop has prompted the central bank to cut rates by 150 bps so
far, taking the benchmark interest rate to a historically low level of 5.0%.

Brazil's current account deficit is expected to widen slightly in 2019 but remain moderate at 2% of GDP. A
falling trade surplus largely reflects the decline in exports. Argentina's economic crisis has led to a
substantial fall in Brazilian exports to its neighboring country. Fitch forecasts the current account deficit to
remain moderate in 2020-21, averaging 2.2% of GDP but will remain fully funded by foreign direct
investment flows. The central bank has sold significant foreign exchange in the spot market in recent
months owing to pressure in the spot BRL market, largely emanating from the corporate repayments of
external debt, which have been refinanced in local markets.

Fitch forecasts international reserves to decline in 2019 although the reserves buffer will remain robust. At
the same time, the central bank's outstanding FX swaps position has declined. As a result, the Net Foreign
Exchange Position, (gross international reserves minus foreign currency credit lines and outstanding FX
swaps), a concept emphasized by the central bank, has not deteriorated despite the spot sales.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch's proprietary SRM assigns Brazil a score equivalent to a rating of 'BBB-' on the Long-Term Foreign
Currency (LT FC) IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by
applying its QO, relative to rated peers, as follows:

--Macro: -1 notch, to reflect weak growth prospects and potential, largely underpinned by low investment
rate and structural impediments such as a difficult business environment, which make it more challenging to
consolidate the public finances and address social pressures.

--Public Finances: -1 notch, to reflect Brazil's high general government debt burden, which is expected to
continue increasing during the forecast period. Fiscal flexibility is constrained by the highly rigid spending
profile and a heavy tax burden.

--Structural Features: -1 notch, to reflect Brazil's fragmented congress and corruption-related issues that
have hampered timely progress on reforms to improve the medium-term trajectory of public finances. In
addition, high income inequality adds to social pressures. }

The removal of the -1 notch under Structural Features since the previous review reflects the passage of the
social security reform, which suggests some easing of the severe political gridlock that had prevailed in
Brazil in recent years. The addition of -1 notch under Macro reflects Fitch's assessment that structural
constraints to potential growth are better reflected in this pillar of the QO.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on
three-year centered averages, including one year of forecasts, to produce a score equivalent to a LT FC
IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not
fully reflected in the SRM.

RATING SENSITIVITIES

The main factors that may, individually, or collectively, result in positive rating action are:

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--Passage of credible policy measures to address large fiscal deficits and medium-term public debt
sustainability;

--Improved prospects for government debt stabilization, for example through a track record of fiscal
consolidation or lower government borrowing costs;

--An improvement in the economic growth outlook without increasing macroeconomic imbalances.

The main factors that may, individually, or collectively, result in negative rating action are:

--Rapid growth in the government debt burden; for example due to setbacks to fiscal consolidation efforts or
growth prospects;

--A severe deterioration in the sovereign's domestic and/or external market borrowing conditions.

--Sharp erosion of international reserve buffer and the broader external balance sheet.

Key Assumptions

The global economy performs largely in line with Fitch's Global Economic Outlook. Fitch assumes that
China (an important trading partner for Brazil) will be able to manage a gradual slowdown and is forecast to
grow at 6.1% in 2019 and 5.7% in 2020. Argentina's economy will continue to underperform in 2019-20, with
growth forecast to average -2.4% during the period.

ESG Considerations

Brazil has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance
Indicators have the highest weight in Fitch's SRM and a highly fragmented congress has made timely
passage of corrective policy adjustments difficult; this is highly relevant to the rating and a key driver with a
high weight.

Brazil has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of
Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and the corruption
related issues exposed in recent years have severely hit political dynamics and economic activity; this is
highly relevant to the rating and a key rating driver with a high weight.

Brazil has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as the Voice and
Accountability pillar of World Bank Governance Indicators is relevant to the rating and a rating driver.

Brazil has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is
relevant to the rating and a rating driver, as for all sovereigns.

Additional information is available on www.fitchratings.com

FITCH RATINGS ANALYSTS

Primary Rating Analyst

Shelly Shetty
Senior Director
+1 212 908 0324
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14/11/2019 Press Release

Secondary Rating Analyst

Todd Martinez
Director
+1 212 908 0897

Committee Chairperson
Ed Parker
Managing Director
+44 20 3530 1176

MEDIA CONTACTS

Elizabeth Fogerty
New York
+1 212 908 0526
elizabeth.fogerty@thefitchgroup.com

Applicable Criteria

Sovereign Rating Criteria (pub. 26 May 2019)

Country Ceilings Criteria (pub. 05 Jul 2019)

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

Solicitation Status
Endorsement Policy

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