DBRS Aligns Brazil’s Issuer Ratings at BB Following Methodology Update

DBRS Inc. has downgraded the Federative Republic of Brazil’s Long-Term Local Currency – Issuer Rating from BB (high) to BB and maintained the Negative trend. DBRS has also downgraded Brazil’s Short-Term Local Currency – Issuer Rating from R-3 to R-4 and changed the trend from Negative to Stable. The rating action reflects the application of DBRS’s updated Rating Sovereign Governments methodology; it does not reflect a change in DBRS’s view of Brazil’s underlying credit fundamentals. The rating action does not have any impact on Brazil’s Long-Term Foreign Currency – Issuer Rating (BB with a Negative trend), Brazil’s Short-Term Foreign Currency – Issuer Rating (R-4 with a Stable trend), or on the rating drivers as explained in DBRS’s last rating report on Brazil (see http://www.dbrs.com/issuer/9397).

On October 10th, 2017, DBRS requested comments on an update to its sovereign methodology. Following the conclusion of that comment period, the final methodology was published on November 27th. As noted in the October 10th press release, the updated methodology revises the approach used to determine whether a differential between foreign and local currency issuer ratings is warranted. As a result of the methodology change, DBRS expected that there would be only a limited number of cases among its existing sovereign ratings where local and foreign currency issuer ratings would differ. Consequently, the October 10th press release indicated that these refinements might have an impact on the ratings of Argentina, Brazil, Colombia, Mexico, and Turkey, most likely affecting the local currency issuer rating.

The alignment of Brazil’s Long-Term Foreign and Local Currency – Issuer Ratings at BB and Short-Term Foreign and Local Currency – Issuer Ratings at R-4 reflects the application of the updated sovereign methodology and DBRS’s view that a differential between the foreign and local currency issuer ratings is no longer warranted. As the macroeconomic fundamentals and financial sophistication of emerging market countries have improved over recent decades, the basis for differentiating the risk between these two issuer ratings has diminished. Brazil is unlikely to face material constraints in terms of its access to foreign exchange given the low stock of public debt issued in foreign currency and the adequate level of international reserves. Risks associated with the larger stock of local currency debt appear to be at least as high as that of foreign currency debt, particularly with a sizable portion of local currency debt indexed to inflation or interest rates. Moreover, DBRS sees no evidence that there is any material difference in the willingness or capacity of the Brazilian government to pay either local currency or foreign currency debt on time and in full. Accordingly, DBRS considers the risk of default on Brazil’s foreign and local currency debt to be approximately equal.

Notes:
All figures are in U.S. Dollars unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found at http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include Banco Central do Brasil, Secretaria do Tesouro Nacional, Instituto Brasiliero de Geografia e Estatística, IMF, WTO, UNDP, World Bank, Tullet Prebon Information, The Conference Board Total Economy Database (Adjusted Version) - May 2017, Banco de Mexico, Banco de la República, Banco Central de Chile, JPMorgan, FUNCEX, NRGI, Brookings, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Michael Heydt, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: 6 July 2006
Last Rating Date: 27 July 2017

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.