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2017.08.1613:08:00UTC+00BRAZIL: S&P Affirms BB Rating

The Standard & Poor's (S&P) rating agency has affirmed Brazil's 'BB' rating and attributed negative outlook to the country's credit note.

According to the agency, the Brazilian Congress has a small window of opportunity to pass controversial bills before political maneuvering ahead of the 2018 presidential election.

"Supported by the government, the Congress has already come up with some measures that should strengthen Brazil's fiscal path and growth even in the face of the adverse political environment in recent months," S&P said in a report.

The rating agency noted that, given the need for a fiscal correction in Brazil, additional efforts to redirect budgetary rigidity can not wait until after the 2018 elections, mainly due to the high and growing Brazilian debt. In this context, S&P cites advances in pension reform and the cut in subsidies for public sector financing.

"If the Congress fails to approve important fiscal-related bills, it will mean the absence of a political resolution, so that we could downgrade the ratings in the face of poor governance and lack of political commitment at various levels of government," S&P said.

The rating agency also noted that a downgrade can happen if the government gives up its commitment to rationalize and contain spending this year and next.

"The review of fiscal targets due to expenditures differs from revisions related to the lack of revenue coupled with poor recovery of tax collections or delays in non-recurring concessional revenues," S&P said.

Among the factors that could stabilize Brazil's credit rating, the agency mentions the government's political commitment, including Congress, to mitigate fiscal deterioration and strengthen prospects for economic growth.

"We expect these factors to help Brazil solidify the economic recovery, improve fiscal performance over the years and provide more room for maneuvers in case of shocks," it said.

S&P also stated that corruption cases involving Brazilian public and private executives and companies have contributed to increasing political uncertainty over the medium term.

"Corruption investigations have hit politicians and parties on all fronts. While poses a risk factor for governance, the independence of such investigations strengthens the power of institutions," S&P said.

On the economic side, the rating agency highlights the Brazilian recovery after periods of contraction. Although the expectation of growth for the country is still below its peers, S&P expects the Brazilian economy to grow 0.5% this year and 2% next year. The inflation rate should accelerate as the economy gains momentum, but must remain within the central bank's target.

Regarding monetary policy, S&P affirms that the loosening cycle started in October 2016 by the Brazilian central bank should continue until the end of 2017. The basic interest rate (Selic) has already been reduced by five percentage points (pp) since the beginning of this cycle, to 9.25% from July.

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