Research Update:

Brazil Outlook Revised To Negative; 'BBB/A-2' Foreign Currency Ratings Affirmed

Primary Credit Analyst: Sebastian Briozzo, Buenos Aires (54) 114-891-2120; sebastian.briozzo@standardandpoors.com Secondary Contact: Lisa M Schineller, PhD, New York (1) 212-438-7352; lisa.schineller@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List

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Research Update:

Brazil Outlook Revised To Negative; 'BBB/A-2' Foreign Currency Ratings Affirmed

Overview
Slow GDP growth and continued expansionary fiscal policy (including off-budget measures) risk weakening Brazil's financial profile and could, absent corrective measures, result in weaker fiscal performance and an increase in the government's debt burden. We are revising the outlook on our long-term ratings on Brazil to negative from stable. We are affirming our 'BBB/A-2' foreign currency and 'A-/A-2' local currency sovereign credit ratings on Brazil. We could lower the credit rating in the coming two years if continued sluggish economic growth, weaker fiscal and external fundamentals, and some loss in the credibility of economic policy given ambiguous policy signals diminish Brazil's ability to manage an external shock.

Rating Action
On June 6, 2013, Standard & Poor's Ratings Services revised the outlook on its long-term ratings on the Federative Republic of Brazil to negative from stable. At the same time, we affirmed our 'BBB' long-term and 'A-2' short-term foreign currency sovereign credit ratings on Brazil. We also affirmed our 'A-' long-term and 'A-2' short-term local currency sovereign credit ratings. The transfer and convertibility assessment is unchanged at 'A-'. Similarly, our 'brAAA' national scale rating on Brazil remains unchanged, and the outlook on the national scale rating remains stable.

Rationale
The credit ratings on Brazil reflect its well-established political institutions, diversified economy, manageable levels of net external debt, and political commitment to policies that maintain economic stability. The ratings also incorporate its relatively large government debt and refinancing needs. Moreover, they reflect the country's substantial demand for investment to improve its physical infrastructure, as well as structural impediments that contribute to low overall investment as a share of GDP (just above 18% in 2012) and constrain GDP growth potential. Brazil is likely to suffer its third year of modest economic growth, with GDP likely to expand only 2.5% in 2013 (after growing 2.7% in 2011 and 0.9% in 2012). The weak growth reflects modest export performance as well as declining private-sector investment, partly because of ambiguous policy signals from the

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Research Update: Brazil Outlook Revised To Negative; 'BBB/A-2' Foreign Currency Ratings Affirmed

government that have dampened investor confidence. The risk of a more persistent slowdown in household spending in the context of higher consumer indebtedness also weighs on Brazil's growth outlook. Slow growth has contributed to a modest weakening of the sovereign's financial profile, including deteriorating fiscal performance and a rise in the government's debt burden.

Outlook
The negative outlook reflects the at least one-in-three probability that a rising government debt burden and erosion of macroeconomic stability could lead to a downgrade of Brazil over the next two years. Continued slow economic growth, weaker fiscal and external fundamentals, and some loss in the credibility of economic policy given ambiguous policy signals could diminish Brazil's ability to manage an external shock. Delays in implementing policies to boost private investment, especially in infrastructure, could contribute to low GDP growth this year and next, thereby raising the risk of further fiscal slippage and a resulting rise in the government's debt burden. Under that scenario, net general government debt to GDP could rise over the next two to three years. In addition, a substantial increase in lending by government-owned banks to stimulate domestic demand could pose asset quality problems for the financial system, especially amid continued slow GDP growth. Conversely, we could revise the outlook to stable following more consistent policy initiatives that generate greater private sector confidence and, thus, higher investment. The resulting boost in the country's trend rate of GDP growth would give the government more fiscal and monetary flexibility.

Related Criteria And Research

Brazil, July 16, 2012 Sovereign Government Rating Methodology And Assumptions, June 30, 2011 Principles Of Credit Ratings, Feb. 16, 2011 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Ratings List
Ratings Affirmed; Outlook Action To Brazil (Federative Republic of) Sovereign Credit Rating Foreign Currency Local Currency Ratings Affirmed From

BBB/Negative/A-2 A-/Negative/A-2

BBB/Stable/A-2 A-/Stable/A-2

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Research Update: Brazil Outlook Revised To Negative; 'BBB/A-2' Foreign Currency Ratings Affirmed

Brazil (Federative Republic of) Sovereign Credit Rating Brazil National Scale Transfer & Convertibility Assessment Senior Unsecured Senior Unsecured Senior Unsecured

brAAA/Stable/-AABBB brAAA

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

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