rating

Publication date: 11-Dec-2003
Reprinted from RatingsDirect
Outlook on Brazil LT FC Rating Revised to Positive from Stable; Ratings
Affirmed
Credit Analysts: Lisa M Schineller, New York (1) 212-438-7352; Helena Hessel, New York (1) 212-438-7349; Regina Nunes, Sao Paulo (55) 11-
5501-8937
NEW YORK (Standard & Poor's) Dec. 11, 2003--Standard & Poor's Ratings
Services said today that it revised its outlook on its long-term foreign currency
sovereign credit rating on the Federative Republic of Brazil to positive from
stable. Standard & Poor's also affirmed its 'BB' long-term local, 'B+' long-term
foreign, and 'B' short-term local and foreign currency sovereign credit ratings
on the republic; the stable outlook on the long-term local currency rating was
affirmed.
According to Credit Analyst Lisa Schineller, the positive outlook on the longterm
foreign currency rating reflects reduced external vulnerability
underpinned by ongoing marked structural improvement in Brazil's trade
balance. "Strong external performance and continued fiscal and monetary
discipline should support a sustained pick-up in growth over the next several
years, underpinned by a recovery of domestic demand in 2004," said Ms.
Schineller. "Declining interest rates and proactive debt management, which
has lowered the share of dollar-linked paper and increased the share of fixedrate
paper in domestic debt, should reduce 'crowding out' of the private sector
and help a rebound in growth," she added.`
A structural shift in Brazil's trade accounts includes broad-based growth in
products and market diversification. Exports as a share of GDP have almost
doubled, to 18% of GDP in 2003, since 1999. As a result, Brazil's external
debt burden has continued to decline over the same period, reaching historic
lows in 2003. External debt, net of liquid assets, is estimated at 210% of
current account receipts, and although this level is still higher than that in peer
credits, Standard & Poor's expects the downward trend to continue in the
coming years. Notwithstanding the projected heavy burden of private sector
medium-term external debt amortization in 2004 (US$27.5 billion, up from
US$15.8 billion in 2003), Brazil's gross external financing needs of 170% of
reserves in 2004 are projected to remain below the 2000-2002 average of
252%, though higher than 2003's low 114%.
Standard & Poor's said that the outlook on the long-term local currency debt
reflects a still-challenging profile of Brazil's domestic debt, despite recent
significant improvement in its profile. The share of dollar-linked paper fell to
around 24% of domestic debt in November 2003 from 37% at year-end 2002,
owing not just to valuation effects stemming from exchange-rate appreciation,
but also to an aggressive policy of reducing the rollover rate of principal. The
share of fixed rate paper stands at around 9% in November 2003 compared
with 2% at year-end 2002.
"Notwithstanding Brazil's recent significant improvement in macroeconomic
stability, which should underpin a recovery in growth during 2004-2005, the
longer-term growth outlook remains vulnerable, unless it is bolstered by
effective microeconomic reform," Ms. Schineller said. "The successful
implementation of reform of the energy sector and regulatory agencies, as
well as labor, bankruptcy, and judicial reform, should reduce institutional risk
and sustain investment and growth prospects beyond the next two years—
which, in turn, could support improving creditworthiness. However, Brazil's
ratings could come under downward pressure if the commitment to prudent
macroeconomic management falters or progress on microeconomic reform is
slow, thereby jeopardizing growth prospects in the medium term," she
concluded. Complete ratings information is available to subscribers of
RatingsDirect, Standard & Poor's Web-based credit analysis system, at
www.ratingsdirect.com. All ratings affected by this rating action can be found
on Standard & Poor's public Web site at www.standardandpoors.com; under
Credit Ratings in the left navigation bar, select Credit Ratings Actions.

Data de Publicação: 11 de dezembro de 2003
Brasil—Comunicado à Imprensa
Standard & Poor's altera perspectiva do rating de crédito soberano de
longo prazo em moeda estrangeira do Brasil para Positiva; ratings
reafirmados
Analistas de crédito: Lisa M. Schineller, Nova York (1) 212-438-7352; Helena Hessel, Nova York (1) 212-438-7349; Regina Nunes, São
Paulo (55) 11-5501-8937
Nova York, 11 de dezembro de 2003 (Standard & Poor’s) – A Standard &
Poor’s revisou hoje, de estável para positiva, a perspectiva do rating de crédito
soberano de longo prazo em moeda estrangeira atribuído à República
Federativa do Brasil. A Standard & Poor’s também reafirmou os ratings de
crédito soberano de longo prazo em moeda local “BB” e em moeda
estrangeira “B+”, bem como os ratings de crédito soberano de curto prazo em
moeda local e em moeda estrangeira “B” atribuídos ao País. A perspectiva
estável do rating de longo prazo em moeda local também foi reafirmada.
De acordo com a analista de crédito, Lisa Schineller, a perspectiva positiva do
rating de crédito soberano em moeda estrangeira reflete a redução da
vulnerabilidade externa do País, sustentada pela melhora estrutural
significativa na balança comercial brasileira. “O forte desempenho externo e a
continuidade da disciplina fiscal e monetária deverão oferecer o apoio
necessário à retomada do crescimento ao longo dos próximos anos, que será
sustentada em 2004 pela recuperação da demanda doméstica”, disse
Schineller. “A queda nas taxas de juros e uma administração pró-ativa da
dívida – que levou à redução dos títulos atrelados ao dólar e aumentou a
participação dos títulos à taxa fixa na dívida doméstica –, deverão reduzir o
crowding out (participação de financiamento ao governo em detrimento do
setor privado) do setor privado e ajudar a retomada do crescimento”,
acrescentou.
A mudança estrutural nas contas comerciais externas do Brasil inclui um
grande aumento na diversificação de produtos e de mercado. A participação
das exportações no Produto Interno Bruto (PIB) do País quase que dobrou
para 18% do PIB em 2003, desde 1999. Como resultado, a carga de dívida
externa do País manteve-se em queda no mesmo período, atingindo níveis
historicamente baixos em 2003. A dívida externa excluindo-se os ativos
líquidos está estimada em 210% das entradas em conta corrente e, embora
ainda seja maior que a registrada por países na mesma categoria de rating do
Brasil, a Standard & Poor’s acredita que a tendência de queda será mantida
nos próximos anos. Apesar de a carga de amortizações da dívida externa de
médio prazo do setor privado ser bastante elevada em 2004 (US$27,5 bilhões
ante US$15,8 bilhões em 2003), projeta-se que as necessidades de
financiamento externo bruto do País, em 170% das reservas em 2004, se
manterão abaixo da média de 252% registrada no período de 2000-2002,
porém acima da registrada este ano (de 114%).
A Standard & Poor’s acrescentou que a perspectiva da dívida de longo prazo
em moeda local permanece estável, refletindo o perfil da dívida doméstica
brasileira, que permanece desafiador apesar da recente melhora. A
participação dos títulos atrelados ao dólar na dívida doméstica caiu para cerca
de 24% em novembro de 2003, ante 37% ao final de 2002, como resultado
não só dos efeitos da apreciação cambial, mas também em função de uma
política agressiva de redução na taxa de rolagem do principal. Atualmente, a
participação dos títulos à taxa fixa é de 9% em comparação a 2% ao final de
2002.
“Apesar de o País ter recentemente registrado uma melhora significativa em
sua estabilidade macroeconômica – o que deverá apoiar a retomada de seu
crescimento ao longo de 2004-2005 –, a perspectiva de crescimento de longo
prazo se manterá vulnerável, a menos que seja fomentada por uma reforma
microeconômica efetiva”, disse Schineller. “A implementação bem sucedida da
reforma do setor de energia e das agências regulatórias, bem como das
reformas da Previdência, Judiciária e da Lei de Falência, deverá reduzir os
riscos institucionais, sustentar os investimentos e as perspectivas de
crescimento para além dos próximos dois anos, o que, por sua vez, poderia
servir de base para a melhora da qualidade de crédito do País. Entretanto, os
ratings do Brasil poderão sofrer pressão de rebaixamento, caso não se
mantenha o compromisso por parte do governo com uma administração
macroeconômica prudente, ou se o progresso das reformas microeconômicas
for lento, de tal forma que prejudique as perspectivas de crescimento a médio
prazo”, concluiu.

Michigan's 'AAA' & 'AA+' Debt Ratings Placed on CreditWatch Negative; Budget Gap Cited

Analyst:
James Wiemken, Chicago (1) 312-233-7005; Steven J Murphy, New York (1) 212-438-2066
Publication date: 03-Nov-03, 14:15:42 EST

CHICAGO (Standard & Poor's) Nov. 3, 2003—Standard & Poor's Ratings Services has placed its 'AAA' and 'AA+' ratings on debt backed by the state of Michigan's GO and annual appropriation pledges on CreditWatch with negative implications pending the resolution of the state's current budget gap.
The state had anticipated ending fiscal 2003 with a $350 million general fund balance, which would allow the state to put $75 million back into the budget stabilization reserve, keep $60 million in the Medicaid trust fund, and place an additional $75 million into a new school reserve fund. After the October revenue revisions, the state now expects to end fiscal 2003 with only about $58 million, placing the anticipated 2004 reserves in jeopardy even before considering the $595 million shortfall in 2004. How the state responds to the current shortfall will affect the immediate reserve position of the state, as well as its ability to continue to rebuild its reserves--both of which weigh heavily on the rating. Standard & Poor's Ratings Services expects the state to address the budget gap before the end of the calendar year.
Credit factors for the state's ratings include effective financial management structure and procedures and policies, several of which contain constitutionally mandated actions on the part of state officials. Additional credit factors include gains in economic diversification, which have reduced, but not eliminated, the relative severity of the effect of national economic softness; a low debt burden; and the relatively solid position of the state's pension liabilities.
Several months of employment losses after apparent stabilization and slow income growth suggest that Michigan will lag the nation in its economic recovery, the question is what the extent of the lag will be. Michigan wage and salary employment is now forecast to grow only 0.6% during calendar year 2004, down from 1.4% as predicted in May. Personal income is forecast to grow 3.8% (down from 5%), while wages and salaries are forecast to grow 3.1% (down from 4.3%). While the state's forecasts are more conservative than others, spent-up demand for automobiles, ongoing market share losses by local automakers, and an uncertain near-term outlook for the office furniture industry suggest that such caution is warranted.
Michigan's combined direct GO and appropriation debt burden remains low at $536 per capita and 1.8% of personal income. Michigan issued $1.2 billion in cash flow notes earlier this year for the first time since 1998. Additional cash flow issuance is expected in fiscal 2004. Although market conditions will likely create some additional pension funding needs, the state's relatively strong funding position is a strength. With the exception of the military retirement plan, which is funded on a pay-as-you-go basis, three of the five defined-benefit pension plans into which the state pays were overfunded as of Sept. 30, 2002; the other two plans' funding ratios were 91.5% and 98.7%. Legislation further requires that state employees hired after March 31, 1997, become members of state-sponsored defined contribution plans, reducing the likelihood of future volatility in funding requirements.
Approximately $15.9 billion of outstanding debt is affected.

Pittsburgh, PA's GO Bonds Rating Lowered Five Notches to 'BB'; On Watch Developing

Analyst:

Karl Jacob, New York (1) 212-438-2111; Jeffrey Panger, New York (1) 212-438-2076
Publication date: 15-Oct-03, 11:05:10 EST
Reprinted from RatingsDirect

NEW YORK (Standard & Poor's) Oct. 15, 2003—Standard & Poor's Ratings Services said today it lowered its rating on Pittsburgh, Pa.'s outstanding general obligation bonds five notches, to 'BB' from 'A-', and placed the rating on CreditWatch with developing implications. The rating was previously placed on CreditWatch with negative implications on Aug. 26.
The rating action reflects disclosure in the "notes to financial statements" section of Pittsburgh's recently released audit questioning the city's ability to operate as a going concern. The note states that "if the city should fail to receive additional taxing authority from the commonwealth and subsequently fails to receive the necessary approval from the city council for tax increases and service cuts, the city would then consider a number of options including those available under Chapter 9 of the Federal Bankruptcy Code."
Standard & Poor's had previously noted the city's significant fiscal stress when placing the rating on CreditWatch in August. While Pittsburgh's fundamental credit characteristics have not changed since then, the unresolved status of the city's legislative requests, the audit note questioning the city's ability to operate as a going concern, and the city's statement that it would consider filing for bankruptcy is inconsistent with an investment grade rating.
"Should the city identify and implement budget-balancing options under its control or successfully negotiate expanded revenue and tax authority, which requires state legislative action, the rating could be restored to investment grade", said Standard & Poor's credit analyst Karl Jacob. "However, if the city continues to consider bankruptcy as an option to its current fiscal situation, a non-investment grade rating would be maintained, and if the city actually availed itself of protection under the bankruptcy code, the rating would be lowered further."
The downgrade affects approximately $879 million of outstanding city general obligation debt.
(For further information on the city's general credit characteristics,
please refer to the most recent analysis on Pittsburgh's general
obligation debt rating, dated Aug. 26, 2003, on RatingsDirect.)

Oregon's GO Debt Rating Lowered to 'AA-' on Weakened Financial Position

Analyst:

Parry Young, New York (1) 212-438-2120; Gabriel Petek, San Francisco (1) 415-371-5042
Publication date: 09-Oct-03, 14:22:46 EST
Reprinted from RatingsDirect

NEW YORK (Standard & Poor's) Oct. 9, 2003—Standard & Poor's Ratings
Services said today it lowered its rating on Oregon's outstanding general
obligation debt to 'AA-' from 'AA', reflecting the state's weakened
financial position resulting from a prolonged economic slowdown.
Following a significant decline in revenues during the 2001-2003
biennium, fund balances at June 30, 2003, are estimated to be minimal,
with a general fund unreserved undesignated balance of $20 million-$30
million. State unemployment is the highest in the nation at 8%.
Credit strengths include a diversified economic base and low debt burden
as a percent of market value.
The outlook is stable, reflecting the expectation that the risks to
implementing the 2003-2005 biennium budget will be manageable, assuming
satisfactory disposition of various legal and other challenges.
This rating action does not affect the rating on the state's $1.02
billion of outstanding general obligation veteran's welfare bonds, which
remain at 'AA' with a stable outlook.
Standard & Poor's also assigned its 'AA-' rating to Oregon's $2 billion
general obligation pension bonds series 2003.
The state pledges its full faith and credit taxing power, excluding the
power to levy ad valorem taxes, to secure the pension bonds, which are
scheduled to sell Oct. 20. The bonds are being issued to pay a substantial
portion of the state's unfunded liability to the Oregon Public Employees
Retirement System. The projected savings from the pension bonds is about
$90 million for the 2003-2005 biennium, with uniform savings in subsequent
years, and total present value savings over the 25-year the life of the
bonds of $500 million.
The downgrade affects approximately $1.1 billion outstanding general
obligation debt.

esse cara paga 386bp...s&p elevou p/ mesmo rating que brz

Turkey L-T Ratings Raised to 'B+' on Continued Commitment to Economic Program; Outlook Stable

Analyst:

Ala'a Al-Yousuf, D.Phil. , London (44) 20-7847-7104; Konrad Reuss, London (44) 20-7847-7102
Publication date: 16-Oct-03, 09:14:22 EST
Reprinted from RatingsDirect

LONDON (Standard & Poor's) Oct. 16, 2003--Standard & Poor's Ratings Services said today it raised its long-term foreign and local currency sovereign credit ratings on the Republic of Turkey to 'B+' from 'B'. At
the same time, the 'B' short-term foreign and local currency sovereign credit ratings on Turkey were affirmed. The outlook is stable.
The long-term foreign currency ratings on the Export Credit Bank of Turkey were also raised to 'B+' from 'B', in line with those on the sovereign, the bank's sole shareholder.
"The upgrade reflects the significant progress that the government has made toward meeting the year-end 2003 financial targets under its IMF-supported program, and its commitment to continue implementing the program in 2004," said Standard & Poor's credit analyst Ala'a Al-Yousuf. "The government debt burden is expected to continue declining as a result of continued ambitious fiscal adjustment and a fall in real interest rates. Confidence in lira-denominated assets has also grown, and the exchange rate and international reserves have strengthened."
The ratings on Turkey remain constrained by its high public sector debt and limited fiscal flexibility. Although public sector net debt is projected to decline further in 2003, it will remain high at just over 70% of GDP at year-end 2003 and year-end 2004. Moreover, this path assumes that the government will continue to make strenuous efforts to reach its public sector primary surplus target under the IMF-supported program (6.5% of GNP), and that real interest rates will continue to decline.
"Despite the government's repeated declarations of its commitment to the IMF-supported program and its huge parliamentary majority, it has faced difficulties in adhering to its fiscal and structural reform pledges fully and in a timely manner," said Mr. Al-Yousuf. "Standard & Poor's assumes that if the government misses its primary surplus targets by a small margin in 2003 and 2004, it will continue to make sufficient progress on structural reforms to maintain a positive market sentiment."
High real interest rates also constrain the ratings. Forward real interest rates on government debt have declined sharply, but are estimated at about 10%. Further reductions will be more difficult to achieve and will depend on a continuation of current policies beyond the expiry of the IMF-supported program at year-end 2004. Inflation has continued to decline, but the central bank has not yet deemed the circumstances right to formally adopt inflation targeting.
Nevertheless, real GDP growth should be close to the target of 5% in 2003 and 2004, supported by a rebound in both domestic demand and exports. External liquidity indicators have also improved. Official gross international reserves are at a record high of about $34 billion. The current account is expected to record wider deficits of about 3.0% of GDP in 2003 and 2.6% in 2004, but the floating exchange rate regime and the cushion of official international reserves significantly mitigate the risk of another crisis. The public sector's net external debt is projected to continue declining as a ratio of current account receipts (CARs), to about
80% by year-end 2003 and 70% by year-end 2004.
"If the government perseveres with the tough fiscal adjustment despite the local elections due in April 2004 and the expiry of the IMF program at year-end 2004, the potential for rating improvements will be increased," said Mr. Al-Yousuf. "Conversely, if it abandons the discipline of the program, then the ratings will come under downward pressure."

ANALYST E-MAIL ADDRESSES
ala'a_al-yousuf@standardandpoors.com
konrad_reuss@standardandpoors.com
sovereignlondon@standardandpoors.com

29sep03 S&P

o que restringe rating?
divida/pib. juros/receita. necessidade de financiamento/reservas. divida externa/entradas conta corrente.

Fundamentos
Os ratings atribuídos ao Brasil são restringidos pelos seguintes fatores:
● Elevada carga de endividamento do governo geral e alta vulnerabilidade às oscilações das taxas de juros e câmbio. O endividamento líquido do governo geral está projetado em 62% do PIB para 2003, assumindo-se uma taxa de câmbio no final do exercício no valor de R$ 3,2 para US$1. Os juros relativos à dívida continuam bastante elevados, em torno de 23% da receita geral do governo.
● Vulnerabilidade externa significativa. Apesar de melhores, as necessidades brutas de financiamento externo do Brasil (déficit em conta corrente, amortizações da dívida de médio e longo prazo e endividamento de curto prazo) estão projetadas em uma média de 141% das reservas para 2003-2004, o que está muito acima da mediana da categoria de rating ‘B’. A dívida externa, excluindo-se os ativos líquidos, está projetada em uma média de 214% das entradas em conta corrente (current account receipts - CAR) para 2003-2004, o que corresponde a mais do que duas vezes o registrado por outros governos soberanos na mediana da categoria de rating ‘B’.
● Fraquezas da estrutura econômica que devem ser mitigadas pela agenda de reformas. Diversas distorções fiscais prejudicam a competitividade da economia e afetam a expansão da pequena base de xportações do País, além de limitarem os gastos nos tão necessários programas sociais. Outros desafios incluem o aprofundamento do mercado de capitais local e as reformas política e judiciária.

Os ratings apóiam-se nos seguintes fatores:
● Fortalecimento do ambiente institucional. O tranqüilo processo de transição política em 2002-2003 destaca o amadurecimento da democracia brasileira. O aprofundamento da cultura de responsabilidade fiscal agora vai além do poder executivo e abrange o Congresso, os governos locais e todas as linhas partidárias.
● Uma carga da dívida fiscal cuja maior parte é denominada em reais e carregada no mercado doméstico. O risco de rolagem é atenuado por um mercado de capitais doméstico relativamente profundo e cativo com relação aos títulos emitidos pelo governo. Os agentes domésticos detêm cerca de 95% da dívida interna. Além disso, embora a conta de capital seja tecnicamente aberta, ela é fortemente monitorada pelo banco central, o que desestimula bastante a fuga de capitais por parte da classe média.
● Uma estrutura macroeconômica consistente, que inclui taxa de câmbio flutuante e estratégias de controle de inflação e consolidação fiscal.

Perspectiva
A perspectiva estável do rating reflete a possibilidade de um maior fortalecimento da posição fiscal do Brasil, incluindo a aprovação das reformas tributária e da Previdência. Dada a grande vulnerabilidade externa e fiscal do Brasil, há pouco espaço para deslizes na política econômica. O progresso oportuno e resoluto das reformas da previdência e tributária deverá impulsionar as perspectivas de crescimento de longo prazo do País, ao abordar as várias fraquezas estruturais do setor público. A qualidade de crédito do País poderia ser fortalecida por fatores como: uma consolidação bem sucedida das reformas; redução da carga de endividamento para um nível mais administrável; e uma administração pró-ativa das dívidas que reduza o estoque de títulos indexados ao dólar e à taxa de juros e que amplie seus prazos. Os ratings atribuídos ao Brasil poderiam novamente sofrer pressão de rebaixamento caso houvesse algum afrouxamento em
seu atualmente sólido desempenho orçamentário e em seu compromisso com uma posição fiscal mais rígida, ou ainda, se houvesse um deslize nas reformas estruturais.

29apr s&p removes neg outlook

(The following statement was released by the ratings agency)
NEW YORK, April 29 - Standard & Poor's Ratings Services said today that it revised its outlook on its long-term local and foreign currency sovereign credit ratings on the Federative Republic of Brazil to stable from negative. Standard & Poor's also affirmed its 'BB' long-term local, 'B+' long-term foreign, and 'B' short-term local and foreign currency sovereign credit ratings on the republic.
"The stable outlook reflects recent progress and prospects for a further strengthening of Brazil's fiscal position," said sovereign analyst Lisa Schineller. "President Luiz Inacio Lula da Silva and his administration have
thus far demonstrated a commitment to stabilize the stock of government debt," she added.
According to Ms. Schineller, first, the government raised the primary (noninterest) surplus target for the nonfinancial public sector for 2003 to a new target of 4.25% of GDP, up from the budgeted 3.75% of GDP (fiscal
performance to date suggests the target could be surpassed). Second, the budget directives law it presented to Congress on April 15, 2003, maintains the higher 4.25% of GDP primary surplus target for 2004, and probably through 2006.
"Reflecting an improved fiscal stance and some real appreciation of the exchange rate, the net general government debt burden is projected to decline this year," Ms. Schineller noted. "However, the debt burden still remains high, leaving limited room for countercyclical fiscal policy and entailing large primary surpluses over the medium term," she said.
The quality of ongoing fiscal adjustment and the sustainability of a decline in the government debt burden are also supported by the government's commitment to pass social security and tax reform, which is to be presented to Congress on April 30, 2003. Standard & Poor's expects that this important reform will be legislated, reflecting a broad political recognition that it is needed to ensure Brazil's fiscal viability over the longer term. Both the electorate and Congress are more inclined to support this reform following several years of debate that has raised the social consciousness of its importance.
Ms. Schineller said that, given Brazil's large fiscal and external vulnerabilities, there is little room for policy slippage. "Timely and resolute progress on pension and tax reform should bolster the country's longer-term growth prospects by addressing several structural weaknesses in the public sector," she explained. "Successful consolidation of reform and a proactive debt management strategy that reduces the stock of dollar- and
interest-rate indexed securities and that extends tenors could strengthen Brazil's credit standing. Brazil's ratings could come again under downward pressure if there is slippage in the current strong budgetary performance and the commitment to a tight fiscal stance and structural reform falters," Ms. Schineller concluded.

The Consequences of a War in Iraq on Sovereign Credit
Ratings
Analyst:
John Chambers, CFA, New York (1) 212-438-7344; David T Beers, London
(44) 20-7847-7101
Publication date: 11-Feb-03, 20:08:40 EST
Reprinted from RatingsDirect
Quick Links
Political Risk
Economic Structure and
Growth Prospects
Fiscal Flexibility, Actual and
Contingent Liabilities
Monetary Stability
External Finances
Conclusion
As the threat of war looms against Iraq, questions arise about
how such a conflict might affect Standard & Poor's 93 sovereign
ratings and about the possible events that could lead to changes
to those ratings. Should war break out, the creditworthiness of all
the rated sovereigns in the Middle East (broadly defined as
Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Oman,
Pakistan, Qatar, Turkey) would come under scrutiny. Countries
that rely heavily upon commercial cross-border financing,
however, may be more at risk.
Ratings are forward-looking assessments of an issuer's capacity
and willingness to service its debt on time and in full. Ratings are
also meant to withstand normal economic, political, commodity,
and interest-rate cycles. Given their forward-looking nature,
ratings draw from judgments by senior analysts as to how
business or political leaders will react when faced with
exogenous shocks. A war in Iraq could push the four cycles out
of their normal range and would test the mettle of all leaders.
Standard & Poor's has maintained its sovereign ratings with a
view that a war, should it occur, would be short and decisive. Its
impact on oil and other commodity prices (including gold) would
be short-lived. Weakness in regional tradable currencies, such as
the Israeli shekel, the Egyptian or Lebanese pounds, or the
Turkish lira, would be manageable. Risk aversion by crossborder
investors and lenders would not rise materially. Under this
benign set of assumptions, any downgrades of sovereign ratings
would stem from factors specific to decisions by the governments
themselves. Conversely, the boost to global consumer and
investor sentiment ensuing from a change in Iraq's regime could
help governments reliant upon commercial external financing and
ease the geopolitical threat currently facing several sovereigns in
the region.
However, as argued in "Looking Back, Looking Forward: A
January View of Sovereign Credit Trends" (RatingsDirect, Dec.
19, 2002), a war in Iraq would tilt the risks to the downside.
Although the most likely outcome of a war in Iraq would be a
speedy victory, much worse scenarios could unfold. A war could
be prolonged, with extensive street fighting in Iraqi cities. Iraqi oil
wells could be set afire. Collateral war damage could extend
beyond Iraq, with extensive damage to oil and port facilities in the
Gulf States. Tel Aviv could be attacked with chemical or
biological weapons. Events such as these could raise the risk to
sovereign creditworthiness in several ways. Following the
methodology for rating sovereign governments set out in
"Sovereign Credit Ratings: A Primer," (RatingsDirect, April 3,
2002), they can be grouped into five categories.
Political Risk
Economic Structure and Growth Prospects
All of the sovereign ratings in the Middle East incorporate
geopolitical risk posed by bellicose regional sovereigns, by the
Intifada, and by the concentration of decision making in those
countries that have limited representative forms of government.
In some cases, the political risk limits upward movement on the
ratings. In none of the ratings is the political environment a
supporting rating factor. However, the rationales for almost all of
the sovereign ratings in the region assume that any conflict will
not inflict permanent damage to a country's productive capacity
and that the current leadership can withstand economic and
political shocks without losing broad support of their populations
for market-oriented programs.
Demonstrations against a war in Iraq may take place in the
Middle East, in Europe, and, indeed, in many countries with
sovereign ratings. In the Middle East and North Africa such
demonstrations may appear to threaten the established order,
but, in fact, may be a useful mechanism that allows public
expression to release local tensions and direct them toward
outside foes. Standard & Poor's views the existing political
institutions in the region as sufficiently strong to resist any
uprising over war protests.
However, if these assumptions prove wrong, if the collateral war
damage is greater than expected, if the current regional
leadership does not respond as well as it responded during
Operation Desert Storm, or if policymaking is paralyzed by civil
dissent, then Standard & Poor's reappraisal of the political risk for
the sovereigns concerned will lead to lower ratings.
Setting aside the risk that a war may result in lasting damage to
the ports, natural gas facilities, or oil wells of the Gulf States
(which, as stated above, is not part of Standard & Poor's central
forecast), a war in and of itself would not materially alter any
rated sovereign's economic structure. Economies that enjoy a
high level of income would continue to do so. The structure of
industry and the operation of labor markets would not be
affected. Financial intermediation and demand for money should
be unchanged, unless the war takes a very bad turn.
However, global growth prospects for the next several years will
be made hostage to the war's outcome. A brief war with limited
collateral damage would bolster prospects for a subsequent
global recovery. However, a prolonged war would keep oil prices
high, perhaps at even twice their current level, which, in turn,
would induce a global economic contraction. All 93 rated
sovereigns would be tested in such an environment. Their fiscal
accounts would worsen, except for the handful of sovereigns with
state-owned oil companies that contribute a large share of
government revenue and national exports. External imbalances
(of both creditor and debtor countries) would become more
pronounced. Trade and capital flows would constrict. Sovereign
ratings that currently have a negative outlook (such as those of
Brazil, Guatemala, India, Israel, Italy, Jamaica, Japan, Morocco,
Fiscal Flexibility, Actual and Contingent
Liabilities
Monetary Stability
the Philippines, and Ukraine,) would be at particular risk of
downgrade.
A traditional fiscal objective of government is to strive in
prosperous periods to maintain flexibility in its budget and to
keep its debt stocks low in order to be able to marshal resources
quickly in time of political and economic pressure, including war.
Thus, for example, a shift in the general government deficit of the
U.S. to a 2.8% of GDP deficit in 2003 from a 0.4% of GDP
surplus in 2001 would not be of concern if it had stemmed only
from inland security and preparations for a war with Iraq (given
the fiscal prudence of the previous decade and America's
relatively modest levels of general government debt, at 51% of
2002 GDP). However, this war comes at a time when several
other sovereigns have particular vulnerabilities (at their various
rating levels) on the fiscal side. War only worsens these fiscal
risks.
Israel's ratings came under pressure in 2002 because of
mounting fiscal problems. Although the government was able to
meet its revised fiscal target for the past year and to pass a
prudent budget for 2003, the worsening economic environment
will necessitate further expenditure reductions. These reductions
may be hard to obtain given the coalition dynamics in Israel, and
its ratings may suffer as a consequence. Lebanon, Turkey, and,
to a lesser extent, Morocco and the Philippines all face
deteriorating debt dynamics, given a past accommodative fiscal
stance, diminished prospects for privatization receipts, and high
debt stocks. Public finances are especially fragile in Lebanon and
Turkey, and without a successful fiscal adjustment these
sovereigns will default. Morocco and the Philippines enter this
potentially troubled period in a stronger position, but they, too,
face downgrades if deficits persist at their current levels.
Most of the sovereign governments in the Middle East have
strong international reserve positions relative to their monetary
bases and stable monetary aggregates. Some Middle Eastern
governments have recently have taken proactive measures to
increase their monetary flexibility. For example, Egypt decided
last month to float the Egyptian pound.
Although banking systems in the region are generally adequate
given the state of development of their respective economies,
three systems were singled out in Standard & Poor's annual
survey of banking conditions as already under stress (see
"Global Financial System Stress," RatingsDirect, Dec. 11, 2002).
Should the war turn badly, this stress will only grow for Egypt,
Lebanon, and Turkey. The fragility of the current state of the
economy and the quality of past loan underwriting standards
have left Turkey and Egypt particularly vulnerable to spiking
levels of nonperforming loans. Standard & Poor's estimates that,
in a reasonable worst-case scenario, gross problematic assets (a
concept more inclusive than nonperforming loans as defined by
domestic regulators) could exceed half of domestic credit in
External Finances
Turkey and Egypt. Although the fiscal costs of providing
assistance to these three banking systems is not
disproportionate to the governments' existing levels of debt
outstanding (given the low level of financial intermediation),
system-wide banking crises in any of the three countries would
disrupt domestic government finance, create difficulties in rolling
over interbank cross-border debt, and would depress economic
activity.
A war with Iraq could worsen many sovereigns' external finances
through two channels. First, the loosening fiscal stance of the
U.S. is likely to keep its current account deficit near 5% of GDP.
Financing this deficit will continue to absorb international capital
flows that would be otherwise available for investment
elsewhere. Nations that rely heavily upon foreign capital and that
are not large exporters to the U.S. would be most affected.
Second, heightened uncertainty would (if Standard & Poor's
assumption on the course of a war proves optimistic) lead to
increased risk aversion, particularly on the part of cross-border
investors. Countries with large commercial external financing
requirements (be they from the public or private sectors) would
be at greater risk than those that do not rely upon confidencesensitive
capital flows. Sovereign ratings at risk would include
those of Brazil, Dominican Republic, Jamaica, and Turkey. To a
lesser extent, the ratings of Belize, Mexico, and the Philippines
could also come under pressure.
Policymakers, however, can mitigate these risks. In some cases,
sovereign governments have been active in raising external
financing early in this year to satisfy much of the public sector
external borrowing requirement. Colombia, Peru, and Chile, to
name but three, have been active issuers in January. Others
sovereigns, such as South Africa, have deep domestic capital
markets with strong local banks. Ongoing privatization programs,
as in Bulgaria, can also help. But indirect risks remain to a
sovereign if the private sector cannot roll over its external debt.
Such is the risk in Brazil, for example, which could place
renewed pressure on the Brazilian real and again increase the
cost of servicing dollar-denominated and dollar-linked public
sector debt due to the effects of currency depreciation.
In other cases, sovereigns have markedly augmented their
international reserves ( China, Hong Kong, Korea, and India).
These reserves can help instill confidence and compensate for
any interruption in inward capital flows. Even though high
reserves are neither a substitute for prudent fiscal policy (see
"Asia: External Strength Can Mask Internal Weakness," Ratings
Direct, Sept. 24, 2002) nor a buttress for political stability, they
expand a sovereign's room to maneuver.
For the Middle Eastern sovereigns in net external asset
positions, this room to maneuver should allow them to safeguard
their financial systems and to ease pressure on their local
currencies. For the net external debtor countries without widely
traded currencies, however, the lack of room to maneuver will be
a stern test.
Conclusion
Within each component of our sovereign rating opinion, Standard
& Poor's makes key forward-looking assumptions. On politics,
they include judgments about internal political stability and the
possibilities of war. On the real economy, they reflect trends on
competitiveness and global economic growth prospects. On
fiscal and monetary policy, they center on the willingness of
policymakers to adjust when needed. On the external position,
they focus on the willingness of policymakers to husband
international reserves and to prefinance maturing external debt,
and on the private sector's capacity to maintain access to
international capital markets. They also make assumptions on
the likelihood of support from the International Monetary Fund
being forthcoming in the case of a balance of payment crisis and
the possibility that such support could engender private sector
involvement requiring debt forgiveness. A quick and decisive
war, if it occurs, should not occasion much change to sovereign
creditworthiness among rated governments. A more difficult war
would be a greater challenge, one that will not necessarily
dissipate as the distance from Baghdad increases. Sovereigns
reliant upon global growth to improve domestic living standards
or to maintain fiscal debt trajectories and, particularly, countries
reliant upon commercial external debt may be far from the
conflict but have their creditworthiness hurt more than those
nations directly in the fray.
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PRESS RELEASE:S&P:Brazil Officials Showing`Prudent'Policy
2003-01-16 15:33 (New York)



The following is a press release from Standard & Poor's:

NEW YORK (Standard & Poor's) Jan. 16, 2003--Standard & Poor's Ratings Services today issued a new commentary article examining the challenges facing the Federative Republic of Brazil's President Luiz Inacio Lula da Silva and his administration in the year ahead. The article, entitled, "Challenges Ahead for Brazil in 2003," comments on the solid and consistent signals regarding economic policy sent by the new government thus far.
"Policy statements by the finance minister and central bank governor highlight a prudent and cautious policy stance," said Sovereign Analyst Lisa Schineller. "However, the government now needs to implement policies and demonstrate its ability to forge effective political alliances in order to extend the improvement in Brazilian asset prices and further enhance the its credibility," she added.
According to Ms. Schineller, given the scope of its fiscal and external vulnerabilities, Brazil's ratings ('B+' long-term foreign and 'BB' long-term local currency sovereign credit ratings) and negative outlook reflect the limited room for policy maneuverability in a challenging global and domestic environment.
"The new administration faces a formidable set of challenges in 2003, and during its tenure in office," Ms Schineller noted. "To tackle many of its difficult social problems, Brazil needs to realize its growth potential. In order to so, the country must first address its serious fiscal and debt-service pressures, which are unlikely to boost growth in the near-term," she said. Ms. Schineller added that, in doing so the administration could foster a "virtuous cycle."
The article examines Brazil's complex fiscal burden and reviews the importance of social security reform and of maintaining the terms of the Fiscal Responsibility Law and the states' debt renegotiation agreements. It also underscores that Brazil's external position is still vulnerable, and weaker than that of its credits.
"Brazil's ratings could come under downward pressure if the commitment to and implementation of disciplined fiscal and monetary policies and structural reform falter, or if policy responses to changing economic conditions prove to be inadequate," said Ms. Schineller. "Corporate distress and/or a systemic weakening of the banking system could also undermine creditworthiness. Brazil's credit standing could stabilize should the new administration obtain broad political support for maintaining a tight fiscal stance, implementing sound policy, and advancing reform that mitigates Brazil's economic vulnerabilities," she concluded.
Contact: Lisa M Schineller, New York (1) 212-438-7352
Helena Hessel, New York (1) 212-438-7349 Copyright 2003, Standard & Poor's Ratings Services