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Research Update: Brazil Outlook Revised To Positive On Prospects For Sustained Fiscal Improvements; 'BB-/B' Ratings Affirmed


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Research Update: Brazil Outlook Revised To Positive On Prospects For Sustained Fiscal Improvements; 'BB-/B' Ratings Affirmed


  • The government continues to implement fiscal consolidation measures aimed at reducing Brazil's still large fiscal deficit.
  • This, along with lower interest rates and gradual implementation of the reform agenda, should contribute to somewhat stronger growth and investment prospects over the next three years, as well as a gradual improvement in fiscal outcomes.
  • We are revising our outlook on Brazil to positive from stable and affirming our 'BB-' long-term and 'B' short-term sovereign credit ratings.
  • The positive outlook reflects prospects for an upgrade in the next two years if further progress--be it prioritization, passage, or execution--on the government's broad fiscal and growth agenda allows for a more rapid reduction in Brazil's fiscal deficits and a stabilization of debt dynamics.

Rating Action

On Dec. 11, 2019, S&P Global Ratings revised the outlook on its long-term ratings on Brazil to positive from stable. At the same time, we affirmed our 'BB-/B' long- and short-term foreign and local currency sovereign credit ratings. We also affirmed our 'brAAA' national scale rating, with a stable outlook, and our transfer and convertibility assessment of 'BB+'.


The positive outlook reflects prospects for an upgrade in the next two years if further progress--prioritization, passage, or execution--on the government's broad fiscal and growth agenda allows for a more rapid reduction of Brazil's fiscal deficits and a stabilization of debt dynamics.

We could also upgrade Brazil if real GDP growth dynamics begin comparing more favorably with peers with a similar level of economic development. Finally, we could raise the ratings if, contrary to our expectations, Brazil's sound external profile strengthens further, despite global volatility, particularly if it maintains a net narrow external creditor position in the coming two years.

Alternatively, policy or economic developments that undermine the passage and implementation of additional corrective reforms in the next two years, harming the prospects for declining government deficits and stabilizing debt trends as well as limiting medium-term growth prospects, would lead us to revise the outlook to stable.


The outlook revision to positive from stable reflects our view that the approval of social security reform and the expected progress on other fiscal and growth measures, combined with moderate growth driven by stronger domestic demand, could improve Brazil's fiscal position over the medium term (next three years). The combined set of initiatives, including a potentially structurally lower interest rate, could lead to stronger fiscal and growth dynamics. In addition, a low interest rate has reduced the interest burden for the government and increased the room for stabilizing Brazil's heavy debt burden.

Nevertheless, we currently expect debt to continue to increase over the next three years in terms of GDP.

Despite the success in passing pension reform, execution risk remains. Advancing legislation tends to be slow and requires strong political leadership and negotiation--in particular because several of the fiscal reforms require constitutional amendments, a critical and very particular condition of Brazil's institutional framework. In addition, because of the narrow room for policy execution, reforms tend to have a marginal short-term impact and a bigger effect in the medium and long term, which makes a sustained agenda and robust political backing even more important.

As a result, success in advancing the rest of the agenda will likely depend on this broader political support and advocacy as well as on the leadership of economic policy officials. (Leadership from Congress has pushed the agenda so far and was key to the approval of pension reform.)

Our ratings on Brazil remain supported by a macroeconomic framework based on inflation targeting and a floating exchange rate. We believe the political system has maintained important checks and balances through political transitions and even during recent episodes of weaker policy performance. Brazil's moderate external vulnerabilities are also a relative credit strength.

Institutional and economic profile: Brazil's reform agenda likely will continue to advance in 2020, though the risk of setbacks remains material
  • The government and Congress have been moving forward with their fiscal and growth reforms agenda, although implementation risks subsist.
  • A slow economic recovery is underway, underpinned by low interest rates and the prospect for passage of additional market-friendly measures.
  • We expect GDP growth of 1% in 2019 and 2% in 2020, mostly stemming from domestic demand.

During its first year in power, the administration of President Jair Bolsonaro has pursued policies and structural reforms aimed at strengthening Brazil's fiscal accounts and encouraging greater private-sector participation in the economy. The passage of solid pension reform in October 2019 marked important progress because the executive and legislative branches worked together to redress one of the fastest-growing components of government spending, which should facilitate compliance with the constitutional spending cap. However, several more complex fiscal issues and economic growth bottlenecks remain.

President Bolsonaro cannot rely on a solid coalition in Brazil's fragmented Congress because he decided not to build coalitions in the same manner previous administration did. Legislators, in office since February 2019, have nonetheless showed broad support to push ahead with needed fiscal and economic reforms. Nevertheless, in the context of a polarized domestic political environment, and the recent protests in South America, passing controversial pieces of legislation that involve changes to Brazil's constitution could prove challenging, especially approaching the municipal elections in October 2020.

The list of reforms envisaged is extensive. The so-called "Mais Brasil" Plan, which was recently sent to Congress, comprises:

  • The Fiscal Emergency Plan (to reduce spending at the three levels of government in episodes of fiscal emergency),
  • A revision of public funds (to eliminate earmarking of public funds and use part of the resources to eliminate public debt), and
  • The Federal Pact (comprises several measures to strengthen the current system, including decentralizing more revenues to local and regional governments).

We expect some parts of these bills to be approved in the next two years. President Bolsonaro has delayed submitting his proposal of administrative reform (focused on new rules regarding public careers for new entrants) because of concerns over the social protests that have hit the region. This is an example of the very narrow room for policy reform that exists. The presentation by the executive power of a tax reform proposal, aiming at simplifying the complicated and distortive tax system, has also been delayed (the Lower House and the Senate have presented their proposals).

Fiscal reforms are not popular, and the process of constructing a pro-reform coalition could take time, as was seen with the pension reform approval process.

Other measures in the agenda include ambitious concessions and privatizations, as well as efforts to open the economy and increase financial intermediation and the formal autonomy of the central bank.

We believe that the performance of the Brazilian economy in the next two years will be key to maintaining political support for advancing other necessary reforms through Congress. Economic growth in the first half of 2019 was disappointing but expansion in the third quarter marginally exceeded expectations, mainly because of private investment and consumption. The monetary easing cycle should contribute to an acceleration of credit growth in the coming quarters.

The reduction in interest rates combined with the release of the formal employee severance funds (FGTS)--which started in September 2019 and will continue through March 2020--should ensure more solid growth in the coming quarters. In addition, a reduction in fiscal risks, following the approval of the pension reform, and the passage of growth-enhancing policies should contribute to a more positive path for economic activity.

On the other hand, a more significant slowdown in the global economy could hinder the recovery of private investment. We project 1% GDP growth in 2019, 2% in 2020, and 2.4% on average in 2021-2022--growth that remains weak given the underperformance of the last five years. With per capita GDP of about US$8,658, Brazil's growth prospects are, in our opinion, below those of its peers.

Flexibility and performance profile: Congress is expected to discuss parts of the ample fiscal agenda and the autonomy of the central bank in the coming quarters
  • We expect fiscal deficits to slowly decline in 2020-2022, but net debt will continue to rise.
  • The current account deficit should remain relatively stable just below 3% of GDP in 2019-2020.
  • Formal autonomy of the central bank could be approved in 2020.

The fiscal deficit is likely to decline in the coming years--from its currently very high levels--on prospects for a slow acceleration in economic activity, additional nonrecurring revenues, and the gradual impact of fiscal consolidation measures. The new pension legislation seeks to save about Brazilian real (R$) 800 billion over the next decade (about US$195 billion) and is crucial to help comply with the constitutional cap on spending. Although, its positive impact on the fiscal balance will be gradual.

Beyond the pension reform, fiscal adjustment measures will be key to turning around Brazil's fiscal profile--this includes controlling mandatory spending (the main pressure coming from social security and personnel expenditures). Several fiscal initiatives of this kind will be discussed in Congress next year.

The decline in the Selic rate should also contribute to an improvement of the fiscal balance by reducing interest payments. The government now anticipates a lower primary deficit than its budget target of R$139 billion, largely as a result of underspending, higher dividends from public companies, and nonrecurring revenue from the transfer of rights auction. In 2019, we expect the general government deficit will fall to 5.9% of GDP, from 7.1% in 2018.

Brazil's indebtedness will likely increase in 2020-2022 despite lower fiscal deficits. We expect general government debt, net of liquid assets (around 19% of GDP, mainly government deposits at the central bank), to reach 61% of GDP in 2019, from 57% in 2018. Although, the acceleration in transfers from public banks to the Treasury could improve this ratio (including around US$30 billion by Brazilian Development Bank BNDES). The fiscal reforms proposed by the government, if implemented, will help achieve this consolidation.

A solid composition of debt supports Brazil's higher debt burden, with low shares of debt in foreign currency (around 4% of the total) and held by nonresidents (12% of the government commercial debt). The banking system's holdings of Brazilian government bonds account for around 26% of the system's total assets. We expect interest to revenues to average 13% during 2019-2022, down from 15% in 2018 and 25% in 2015. We assess contingent liabilities from the financial sector and all Brazilian nonfinancial public enterprises (including Petrobras) as limited.

Brazil's state and municipal governments face similar budgetary challenges as the federal government--notably the issue of rising nondiscretionary spending (payroll and pensions). That reduces capacity to spend on impaired infrastructure and basic services. Higher spending pressures would translate into generally weak liquidity conditions, while access to external financing is narrow due to prudential rules and debt levels.

Currently, Congress is considering a bill to facilitate the replication of the pension reform at the federal level to LRGs. Even though we expect some states to promote reforms in local legislatures in 2020, progress could be hindered by political considerations ahead of October's municipal election. In addition, the proposed Federative Pact submitted recently to Congress seeks to address some fragilities of Brazil's federal fiscal framework.

We expect Brazil's external profile to remain solid. With the slowdown of global growth and commodity prices, Brazil's export performance has been weakening since the beginning of the year. We expect the current account deficit (CAD) to widen from 2.2% of GDP in 2018 (following the central bank recent revision of its balance of payment statistics) to 2.9% of GDP for 2019. The higher payments of profits and dividends have also been leading to an increase in the CAD. Stronger exports growth will be sustained by higher production of oil, iron ore, and soybeans, while the more robust domestic demand will underpin higher imports.

Brazil is still receiving a strong flow of direct investment, around 4% of GDP, sufficient to finance the CAD. As the government and private sector's external debt continues to rise, we expect narrow net external debt to gradually return to a debtor position in 2019-2022.

We calculate our estimates of external debt on a residency basis. They include nonresident holdings of locally issued real-denominated government debt projected at about US$119 billion as of December 2019 (about 40% of current account receipts). Our external debt data, however, does not include debt raised offshore by Petrobras and other Brazilian companies that is transferred in the form of foreign direct investment to head offices in Brazil. This is captured in Brazil's net external liability position, estimated at 220% of current account receipts in 2019.

Brazil's very large external liability position suggests that there are greater risks to its external accounts should market conditions deteriorate. Although foreign direct investment generally presents a much smaller risk than external debt, it still exposes the economy to swings in investor confidence, potentially resulting in balance-of-payments pressure in case of accelerated repatriation of profits and equity.

Trade liberalization is one of the government priorities since it should help support Brazil's longer-term growth prospects. The administration aims to forge trade deals with several partners and to gradually reduce tariffs and nontariff barriers.

The Brazilian real floats and is an actively traded currency. Brazil has lower external financing needs compared with its current account receipts (68% in 2019) and high international reserves relative to some of its peers.

The Central Bank of Brazil (BCB) has consolidated credibility over the past three years. Actions under the inflation-targeting regime enabled it to anchor inflation expectations. We expect average annual inflation of around 3.7% in 2019-2022, in line with targets. The low inflation in a context of weak economic growth and easing monetary policy in developed countries allowed the BCB to reduce the Selic rate in 2019 to historically low levels.

The government and Congress back the approval of legal independence for the central bank. The bills currently being discussed in Congress establish fixed terms of four years for the board members that do not coincide with the presidential term. In our opinion, the enhanced framework could reduce uncertainties related to electoral cycles and shield the BCB from possible political interference in the conduct of monetary policy. The central bank has also been moving forward initiatives to improve financial system efficiency and increase financial inclusion.

Key Statistics

Table 1

Brazil--Selected Indicators
2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f 2022f
Economic indicators (%)
Nominal GDP (bil. LC) 4,814.76 5,331.62 5,778.95 5,995.79 6,267.21 6,583.32 6,889.18 7,207.42 7,584.21 8,040.67 8,557.35
Nominal GDP (bil. $) 2,464.05 2,472.82 2,456.04 1,802.21 1,798.53 2,062.51 1,885.47 1,829.00 1,844.75 1,932.27 2,037.46
GDP per capita ($000s) 12.3 12.3 12.1 8.8 8.7 9.9 9.0 8.7 8.7 9.0 9.5
Real GDP growth 1.9 3.0 0.5 (3.5) (3.3) 1.4 1.3 1.0 2.0 2.2 2.5
Real GDP per capita growth 1.0 2.1 (0.3) (4.3) (4.1) 0.5 0.5 0.2 1.2 1.5 1.9
Real investment growth 0.8 5.8 (4.2) (13.9) (12.1) (2.6) 3.9 3.0 3.8 3.6 3.6
Investment/GDP 21.4 21.7 20.5 17.4 15.0 14.6 14.8 15.2 15.5 15.7 15.9
Savings/GDP 18.0 18.5 16.4 14.4 13.6 13.9 12.6 12.3 12.6 12.9 13.2
Exports/GDP 11.7 11.6 11.0 12.9 12.5 12.5 14.9 14.1 13.7 13.4 13.0
Real exports growth 0.3 2.4 (1.1) 6.8 0.3 4.9 4.0 (0.8) 2.4 3.3 3.7
Unemployment rate 7.3 7.1 6.8 8.5 11.5 12.7 12.3 12.0 11.0 9.9 9.6
External indicators (%)
Current account balance/GDP (3.4) (3.2) (4.1) (3.0) (1.3) (0.7) (2.2) (2.9) (2.9) (2.8) (2.8)
Current account balance/CARs (28.4) (26.7) (36.6) (23.6) (10.3) (5.3) (14.2) (18.0) (17.8) (17.5) (17.8)
CARs/GDP 12.0 12.1 11.3 12.8 13.1 13.6 15.5 15.9 16.0 15.9 15.5
Trade balance/GDP 0.7 0.0 (0.3) 1.0 2.5 3.1 2.8 2.0 2.0 1.9 1.8
Net FDI/GDP 3.7 2.4 2.7 3.4 3.3 2.3 4.0 2.8 3.3 3.3 3.2
Net portfolio equity inflow/GDP (0.1) 0.2 0.4 0.5 0.7 (0.2) (0.3) 0.0 0.0 0.0 0.0
Gross external financing needs/CARs plus usable reserves 70.8 70.0 75.5 70.8 64.7 63.0 63.7 68.2 67.9 68.1 68.1
Narrow net external debt/CARs (2.3) 3.3 31.1 9.7 (0.9) (6.4) (8.5) 1.6 7.4 11.9 17.3
Narrow net external debt/CAPs (1.8) 2.6 22.7 7.8 (0.8) (6.1) (7.5) 1.3 6.3 10.2 14.7
Net external liabilities/CARs 269.4 242.6 255.0 162.3 240.2 229.9 202.8 220.5 230.1 234.4 242.3
Net external liabilities/CAPs 209.8 191.4 186.6 131.3 217.8 218.3 177.7 186.9 195.3 199.5 205.7
Short-term external debt by remaining maturity/CARs 27.0 30.9 36.7 58.6 52.2 39.6 30.9 38.1 35.7 34.2 32.3
Usable reserves/CAPs (months) 11.2 11.8 11.4 15.3 16.4 14.8 13.4 13.1 12.8 12.5 12.3
Usable reserves (mil. $) 373,161 358,810 363,556 356,470 364,987 373,969 374,711 373,074 377,966 381,166 380,349
Fiscal indicators (general government; %)
Balance/GDP (2.2) (2.9) (5.8) (10.1) (8.9) (7.7) (7.1) (5.9) (5.7) (5.6) (5.3)
Change in net debt/GDP 3.9 2.2 9.7 6.7 4.8 6.6 3.4 6.2 6.5 6.5 6.3
Primary balance/GDP 2.2 1.7 (0.5) (1.8) (2.5) (1.7) (1.6) (1.0) (1.2) (1.1) (1.0)
Revenue/GDP 36.7 36.8 35.2 34.7 34.9 35.0 35.9 36.9 35.9 35.1 34.2
Expenditures/GDP 38.8 39.7 41.0 44.7 43.8 42.7 42.9 42.8 41.7 40.6 39.5
Interest/revenues 12.0 12.5 15.1 23.9 18.3 17.2 15.1 13.3 12.6 12.8 12.8
Debt/GDP 53.7 51.5 56.3 65.5 69.9 73.7 76.5 79.8 82.3 84.1 85.3
Debt/revenues 146.4 140.0 159.9 189.0 199.9 210.8 213.3 216.5 229.3 240.0 249.8
Net debt/GDP 39.5 37.9 44.6 49.7 52.4 56.5 57.4 61.0 64.5 67.3 69.5
Liquid assets/GDP 14.2 13.6 11.7 15.8 17.5 17.3 19.2 18.8 17.9 16.8 15.8
Monetary indicators (%)
CPI growth 5.4 6.2 6.3 9.0 8.7 3.4 3.7 3.6 3.3 3.8 3.9
GDP deflator growth 7.9 7.5 7.8 7.6 8.1 3.6 3.3 3.6 3.2 3.7 3.8
Exchange rate, year-end (LC/$) 2.04 2.35 2.66 3.90 3.26 3.31 3.87 4.10 4.15 4.20 4.20
Banks' claims on resident non-gov't sector growth 16.4 14.1 12.1 7.9 (3.7) (5.7) 1.5 7.2 7.6 7.7 7.8
Banks' claims on resident non-gov't sector/GDP 58.4 60.2 62.3 64.8 59.7 53.6 52.0 53.2 54.5 55.3 56.0
Foreign currency share of claims by banks on residents N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Foreign currency share of residents' bank deposits N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Real effective exchange rate growth (10.8) (6.1) (2.1) (17.7) 4.9 8.5 (10.4) N/A N/A N/A N/A
Sources: Central Bank (Economic Indicators), International Monetary Fund, Central Bank (External Indicators), International Monetary Fund, Central Bank, Ministry of Finance (Fiscal Indicators), and International Monetary Fund, Central Bank (Monetary Indicators).
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

Brazil--Ratings Score Snapshot
Key rating factors Score Explanation
Institutional assessment 4 Brazil has a stable and solid democracy with solid check and balances, along with a strong private sector and a vocal press. The current administration is advancing market-friendly reforms in order to reduce the fiscal imbalances and boost productivity. There are ample and timely data releases, which are vetted by federal accounting body for irregularities after release.
Economic assessment 5 Based on GDP per capita (US$) and growth trends as per Selected Indicators in table 1.
Weighted average real GDP per capita trend growth over a 10-year period is at 0.4%, which is well below sovereigns in the same GDP category.
External assessment 3 The real is an actively traded currency, accounting for 1% of global foreign exchange market turnover.
There is a risk of marked deterioration in the cost of or access to external financing, due to financing of current account deficits through FDI inflows. The net external liability position is worse than the narrow net external debt position by over 100% of CAR, as per Selected Indicators in table 1.
Fiscal assessment: flexibility and performance 5 Based on the change in net general government debt (% of GDP) as per Selected Indicators in table 1.
Fiscal assessment: debt burden 5 Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in table 1.
The banking sector’s exposure to the government is around 25% of its assets.
Monetary assessment 3 The real is a free-floating currency, and the central bank intervenes occasionally.
The central bank has a track record of de facto independence. CPI as per Selected Indicators in table 1.
Indicative rating bb
Notches of supplemental adjustments and flexibility (1) In our base case, we expect fiscal consolidation to continue. We would like to see a further realization of our base case to confirm that it was not temporary and give full credit to the fiscal consolidation process. We would then remove the notch of flexibility.
Final rating
Foreign currency BB-
Notches of uplift 0 Default risks do not apply differently to foreign- and local-currency debt.
Local currency BB-
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.

Related Criteria

  • General Criteria: Methodology For National And Regional Scale Credit Ratings, June 25, 2018
  • Criteria | Governments | Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
  • General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
  • General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
  • General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research

  • Sovereign Ratings History, Dec. 4, 2019
  • Credit Conditions Latin America: Political Challenges Will Prevail In 2020, Dec. 3, 2019
  • Brazil Has Passed Pension Reform: What’s Next?, Oct. 24, 2019
  • Sovereign Risk Indicators,
  • Banking Industry Country Risk Assessment: Brazil, March 28, 2019

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action
To From


Sovereign Credit Rating BB-/Positive/B BB-/Stable/B
Ratings Affirmed


Sovereign Credit Rating
Brazil National Scale brAAA/Stable/--
Transfer & Convertibility Assessment BB+


Senior Unsecured BB-
Senior Unsecured brAAA

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on S&P Global Ratings' public website at Use the Ratings search box located in the left column.

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