SOVEREIGN AND SUPRANATIONAL

CREDIT OPINION
16 December 2021
Government of Brazil – Baa2 stable
Update following forecast change
Update
Summary
Brazil's credit profile balances its high debt burden and economic contraction in 2020
because of the negative impact of the coronavirus pandemic on economic activity, against
limited balance-of-payments and external financing risk and a favorable government debt
structure. In view of the weak quarterly data, we expect Brazil's economy to grow by 4.8% in
2021 and 0.6% in 2022.
Contacts
Samar Maziad +1.212.553.4534 Exhibit 1
VP-Senior Analyst Brazil's credit profile is determined by four factors
samar.maziad@moodys.com
Economic Institutions and Fiscal Susceptibility
Serra Battal +1.212.553.0300 strength governance strength strength to event risk
Associate Analyst baa2 baa3 b1 baa
serra.battal@moodys.com
Mauro Leos +1.212.553.1947 Economic resiliency
Associate Managing Director
baa2
mauro.leos@moodys.com

CLIENT SERVICES Government financial strength

baa2
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Scorecard-indicated outcome
Japan 81-3-5408-4100
Baa3 - Ba2
EMEA 44-20-7772-5454
Source: Moody's Investors Service

Credit strengths
» Large and diversified economy

» Favorable government debt structure, with limited foreign-currency exposure and low
share of nonresident domestic debt holdings

» High level of international reserves

» Strong capital and liquidity ratios in the banking system

Credit challenges
» High government debt burden and relatively high interest burden

» Track record of weak economic growth, coupled with a moderate potential for growth
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Rating outlook
The stable outlook reflects our expectation that reforms will resume next year as the impact of the pandemic on economic activity
recedes. We expect the government to implement the fiscal measures required to stabilize government debt over the next two to three
years. The outlook incorporates our expectation of a moderate recovery in economic growth as well as a low interest rate environment.

Factors that could lead to an upgrade

We would change the outlook on Brazil's rating to positive if the reform agenda proves effective in furthering fiscal consolidation and
economic growth.

Factors that could lead to a downgrade

Negative pressure on Brazil's credit profile would emerge in a scenario where political dynamics worsen to the point that they affect
reform implementation and impede post-pandemic economic recovery. Delays in adopting reforms that allow the government to
comply with the spending ceiling and stabilize the debt burden or a significantly deeper and more protracted shock from the pandemic
that further erodes economic and fiscal strengths would also strain Brazil's rating.

Key indicators

Brazil 2016 2017 2018 2019 2020 2021F 2022F 2023F

Real GDP (% change) -3.5 1.6 1.7 1.2 -4.2 4.8 0.6 2.0
Inflation (CPI, % change, Dec/Dec) 6.3 2.9 3.7 4.3 4.5 10.0 5.0 4.0
Gen. gov. financial balance/GDP (%)[1] -9.0 -7.9 -7.1 -5.9 -13.3 -6.0 -5.9 -6.2
Gen. gov. primary balance/GDP (%)[1] -2.5 -1.8 -1.7 -0.9 -9.1 -2.0 -1.9 -1.8
Gen. gov. debt/GDP (%) 69.8 73.7 75.3 74.4 88.6 83.4 84.9 85.9
Gen. gov. debt/revenues (%) 227.9 242.2 246.0 236.3 302.5 256.5 262.7 270.0
Gen. gov. interest payment/revenues (%) 21.2 20.0 17.7 15.8 14.3 12.2 12.3 13.7
Current account balance/GDP (%) -1.4 -1.1 -2.7 -3.5 -1.7 -1.9 -2.6 -2.4
External debt/CA receipts (%)[2][3] 286.6 237.7 227.3 232.8 241.7 211.9 205.9 205.9
External vulnerability indicator (EVI) [4][5] 44.9 43.5 44.2 43.6 49.8 43.0 39.0 40.1
[1] Non-financial public sector; Excludes Petrobras and Eletrobras
[2] Current Account Receipts
[3] External debt includes intercompany loans
[4] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/Official Foreign Exchange Reserves
[5] Total non resident deposits over one year are zero
Source: Moody's Investors Service

Detailed credit considerations

Our assessment of economic strength at “baa2” balances the large scale of Brazil's economy, its high degree of diversification and
GDP per capita (purchasing power parity basis) of $14,916 in 2020 against moderate growth prospects. The final score is one notch
above the initial score due to the impact of the pandemic on economic activity bringing the average real GDP change to 0.8% in the
scorecard. An extended period of low economic growth has also raised questions about Brazil's potential growth rate. Average annual
GDP growth in 1999-2013 was 3.4% and -1.17% in 2015-20. We expect the economy to grow by 4.8% in 2021 in real terms as it
rebounds from the pandemic and around 0.6% in 2022.

Brazil's score for institutions and governance strength is “baa3,” reflecting relatively low rankings in government effectiveness
and control of corruption, as measured by the Worldwide Governance Indicators, as well as our assessment of the strength of Brazil's
institutional arrangements and policy credibility. The country's relatively low rankings in terms of government effectiveness and
control of corruption understate the strength of Brazil's institutional arrangements, particularly the effectiveness of monetary and
macroeconomic policies. More recently, the approval of critical fiscal reforms with support from Congress and the public underpins our
assessment of Brazil's institutional strength.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 16 December 2021 Government of Brazil – Baa2 stable: Update following forecast change
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

We have set Brazil's fiscal strength score at “b1,” reflecting high debt levels (although with a favorable debt structure) and a rigid
spending structure. Brazil's debt dynamics have been supported by a consistent drop in interest rates, and debt accumulation has been
relatively contained as a result of one-off revenue, particularly related to the early repayment of the debt owed by Banco Nacional de
Desenvolvimento Economico e Social (BNDS, Ba2 stable) before the pandemic. The low economic growth and additional spending for
mitigating the impact of the pandemic resulted in the debt burden increasing significantly to 88.8% in 2020 from 74.3% in 2019. We
expect the debt burden to stabilize around 85% by 2023.

We assess Brazil's susceptibility to event risk to be “baa,” driven by moderate banking sector risk given the ba2 average Baseline
Credit Assessment for Brazil's financial institutions and the potential risk to the sovereign derived from the relative size of the banking
system, with total domestic banking assets equivalent to around 113% of GDP in 2020. Political risk at “baa” reflects the potential risk
that political developments could hurt the approval process of fiscal reforms. We set Brazil's external vulnerability risk score at “aa” to
reflect Brazil's low external vulnerability. The current account deficit is fully covered by foreign direct investment flows, while a large
international reserve buffer provides ample cover against external financial shocks. Government liquidity risk is set at “a,” reflecting
the small share of foreign-currency-denominated debt in total debt and access to a deep domestic financial market, which mitigates
refinancing risk.

ESG considerations
Brazil's ESG Credit Impact Score is moderately negative CIS-3.

Exhibit 3
ESG Credit Impact Score

Source: Moody's Investors Service

Brazil’s ESG Credit Impact Score is moderately negative (CIS-3) reflecting moderate exposure to environmental and social risks, and
moderately strong institutions. Social risks are moderately negative, due to high income inequality, and exposure to environmental risk
is moderately negative.

Exhibit 4
ESG Issuer Profile Scores

Source: Moody's Investors Service

3 16 December 2021 Government of Brazil – Baa2 stable: Update following forecast change
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Environmental
We assess Brazil’s exposure to environmental risks as moderately negative (E-3 issuer profile score) reflecting high carbon-transition
risk, impacting one of its key industries; balanced against Brazil’s rich natural capital and large landmass, and high economic
diversification.

Social
Exposure to social risks is moderately negative (S-3 issuer profile score), balancing broadly supportive demographic trends and a large
social safety net, against high income inequality and some deficiency in the provision of basic services. Future social pressure may arise
if economic growth continues to remain subdued, leading to persistent deterioration in standards of living.

Governance
The influence of governance on Brazil’s credit profile is neutral-to-low (G-2 issuer profile score) reflecting the impact of relatively weak
governance indicators related to corruption and rule of law. However, the country's relatively low rankings in terms of government
effectiveness and control of corruption, as measured by the Worldwide Governance Indicators, understate the strength of Brazil's
institutional arrangements, particularly the effectiveness of the judiciary and improving monetary policy framework.

ESG Issuer Profile Scores and Credit Impact Scores for the rated entity/transaction are available on Moodys.com. In order to view the
latest scores, please click here to go to the landing page for the entity/transaction on MDC and view the ESG Scores section.

All of these considerations are further discussed in the “Detailed credit considerations” section above. Our approach to ESG is
explained in our report on how the scores depict varied and largely credit-negative impact of ESG factors and our cross-sector
methodology General Principles for Assessing Environmental, Social and Governance Risks Methodology.

Recent developments
On 2 December, Brazil's Instituto Brasileiro de Geografia e Estatística (IBGE) announced that third-quarter GDP contracted 0.1%, after
contracting 0.4% in the second quarter. The second consecutive quarterly contraction is credit negative, prompting us to revise our
forecast for real GDP growth to 4.8% in 2021 from 5.2% and to 0.6% in 2022 from 2.1% (Exhibit 5). Still, fiscal consolidation efforts
support Brazil’s credit profile.

Agriculture contracted 8% on a quarterly basis, with coffee, cotton and corn leading the decline. However, the services sector grew
by 1.1% as household consumption and government consumption grew 0.9% and 0.8% respectively in the same period. Overally,
industrial production stayed constant with construction sector growing by 3.9% on a quarterly basis while electricity, gas and sewage
services dropped by 1.1%. Our revised GDP 2022 forecast (Exhibit 6) reflects our view that household and government consumption
will drive growth. Brazil's high rate of vaccinations relative to other Latin American countries will support service sector activity next
year as well.

4 16 December 2021 Government of Brazil – Baa2 stable: Update following forecast change
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Exhibit 5 Exhibit 6
Agriculture drove the decline in the third quarter... … negatively affecting growth for 2022
Quarterly change, seasonally adjusted %, period change
9
Agriculture
8

Gross fixed capital formation 7

6
Industrial Production
5
Government consumption 4

3
Household consumption
2
Services 1

0
GDP
-1
-10% -8% -6% -4% -2% 0% 2% Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 2021F 2022F 2023F

Sources: Instituto Brasileiro de Geografia e Estatística, Moody's Investors Service Forecast years are annual change
Sources: Instituto Brasileiro de Geografia e Estatística and Moody's Investors Service

We expect a strong rebound in revenue collection and a drop in pandemic-related spending will significantly reduce Brazil's fiscal deficit
to 6% of GDP this year and next, from 13% in 2020, despite planned increases in social expenditure. At the same time, we expect
Brazil's debt burden to remain around 85% of GDP in 2022 after peaking at almost 89% of GDP in 2020. However, weaker growth and
still high inflation will weigh on private consumption and add downside risk to government revenue performance, which may weaken
fiscal performance.

5 16 December 2021 Government of Brazil – Baa2 stable: Update following forecast change
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Moody's rating methodology and scorecard factors: Brazil - Ba2 Stable

Factor / Sub-Factor Metric Indicator Year Indicator Initial Final

Weights
Factor score

Factor 1: Economic strength baa3 baa2 50%

Growth dynamics Average real GDP growth (%) 2016-2025F 0.8 caa1 25%
Volatility in real GDP growth (%) 2011-2020 3.0 ba3 10%

Scale of the economy Nominal GDP ($ billion) 2020 1,448.6 aaa 30%

National income GDP per capita (PPP, Intl$) 2020 14,890 baa3 35%

Adjustment to factor 1 # notches 1 max ±9

Factor 2: Institutions and governance strength baa3 baa3 50%

Quality of institutions Quality of legislative and executive institutions baa 20%
Strength of civil society and the judiciary baa 20%

Policy effectiveness Fiscal policy effectiveness ba 30%

Monetary and macroeconomic policy effectiveness baa 30%

Specified adjustment Government default history and track record of arrears 0 max -3

Other adjustment to factor 2 # notches 0 max ±3

F1 x F2: Economic resiliency baa3 baa2

Factor 3: Fiscal strength b1 b1

Debt burden General government debt/GDP (%) 2020 88.6 b1 25%
General government debt/revenue (%) 2020 302.5 ba3 25%

Debt affordability General government interest payments/revenue (%) 2020 14.3 ba3 25%
General government interest payments/GDP (%) 2020 4.2 b1 25%

Specified adjustments Total of specified adjustment (# notches) -1 -1 max ±6

Debt trend 2016-2021F 13.5 -1 -1
Foreign currency debt/general government debt 2020 6.2 0 0
Other non-financial public sector debt/GDP 2020 0.0 0 0
Public sector assets/general government debt 2020 0.0 0 0

Other adjustment to factor 3 # notches 0 max ±3

F1 x F2 x F3: Government financial strength baa3 baa2

Factor 4: Susceptibility to event risk baa baa Min

Political risk baa
Domestic political risk and geopolitical risk baa
Government liquidity risk a a
Ease of access to funding a
Specified adjustment High refinancing risk 0 max -2
Banking sector risk baa baa
Risk of banking sector credit event (BSCE) Latest available ba2 ba1-ba2
Total domestic bank assets/GDP 2020 112.3 80-180
Adjustment to F4 BSR # notches 0 max ±2
External vulnerability risk aa aa
External vulnerability risk aa
Adjustment to F4 EVR # notches 0 max ±2
Overall adjustment to F4 # notches 0 max -2

F1 x F2 x F3 x F4: Scorecard-indicated outcome Ba1 - Ba3 Baa3 - Ba2

Note: While information used to determine the grid mapping is mainly historical, our ratings incorporate expectations around future metrics and risk developments that may differ from the ones implied by the
scorecard-indicated outcome. Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into account
that may result in an assigned rating outside the scorecard-indicated outcome. For more information please see our Sovereign Ratings Methodology.

Source: Moody's Investors Service

6 16 December 2021 Government of Brazil – Baa2 stable: Update following forecast change
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Moody's related publications

» Issuer Comment: Government of Brazil: Brazil's second consecutive quarterly GDP contraction is credit negative, despite ongoing
fiscal consolidation, 10 December 2021

» Credit Analysis: Government of Brazil – Ba2 stable: Annual Credit Analysis, 1 July 2021

» Issuer In-Depth: Government of Brazil: FAQ on sovereign credit challenges amid rising political risk, 25 October 2021

» Country Statistics: Brazil, Government of

» Outlook: Sovereigns – Latin America & Caribbean: 2022 outlook stable as growth recovers and debt levels stabilize; political risks
rising, 16 November 2021

» Rating Methodology: Sovereign Ratings Methodology, 25 November 2019

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All
research may not be available to all clients.

7 16 December 2021 Government of Brazil – Baa2 stable: Update following forecast change
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

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8 16 December 2021 Government of Brazil – Baa2 stable: Update following forecast change