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Fitch Downgrades Brazil to 'BBB-'; Outlook Negative

(The following statement was released by the rating agency) NEW YORK, October 15 (Fitch) Fitch Ratings has downgraded Brazil's sovereign ratings as follows: --Long-term foreign and local currency IDRs to 'BBB-'from 'BBB'; Outlook remains Negative; --Senior unsecured foreign and local currency bonds to 'BBB-' from 'BBB'; --Country Ceiling to 'BBB' from 'BBB+'; --Short-term foreign-currency IDR to 'F3' from 'F2'. KEY RATING DRIVERS The rating downgrade reflects Brazil's rising government debt burden, increased challenges to fiscal consolidation and a worsening economic growth backdrop. The difficult political environment is hampering progress on the government's legislative agenda and creating a negative feedback loop for the broader economy. The Negative Outlook reflects Fitch's view that economic and fiscal underperformance is likely to persist while political uncertainty could continue weighing on broader confidence, delay a turnaround in investment and growth, and increase risks for the medium term fiscal consolidation needed for debt stabilization. The greater than anticipated impact of economic recession on government revenues, difficulty in implementing offsetting measures and a complicated political backdrop have undermined the government's fiscal consolidation strategy. Consequently, in July the government lowered the primary surplus targets materially for 2015 and beyond. In another setback to fiscal credibility, the government submitted a 2016 budget with an even weaker fiscal goal. Although the government is working on certain tax and spending proposals to regain the fiscal path embedded in the July projections, considerable uncertainty remains on implementation especially in the context of the current political gridlock. Curbing mandatory spending is gaining importance in light of an already high tax burden and budgetary rigidities, limits to further cuts in discretionary spending and a shallow economic recovery. However, such measures will require broader political consensus and support, which may be difficult to obtain. Fitch currently projects that the general government deficit will deteriorate to close to 9% of GDP in 2015 due to higher interest payments, partly reflecting the losses on FX swaps offered by the central bank. Average fiscal deficits during 2016-17 are forecasted to remain elevated at over 6% of GDP, based on Fitch's expectation that the government will have difficulty in reaching its stated primary surplus targets of 0.7% and 1.3% of GDP, in 2016 and 2017, respectively. Fitch forecasts a primary balance in 2016 and a surplus of 0.5% of GDP in 2017, although downside risks persist to our forecasts. As a result, Fitch forecasts Brazil's general government debt burden to reach close to 70% of GDP by 2016 (significantly above the 'BBB' median of 43%)...