INCRA Brazil Rating Report 2015

Rating: 5.4 (BBB+)

BRAZIL

Negative outlook

Transparency and Accountability

Public Sector Fiscal Policy

8

6

4

2

6.0

4

6

8

Strategic Capacity

6.5 6.3

• High ratio of M2 to foreign exchange reserves

Implementation

• Per capita income about one third of advanced industrial countries

Adaptability External Sector

• Growing current account deficits • Rapidly growing ratio of domestic credit to GDP

6.3 3.9

Weaknesses: • Slow real GDP growth

10

6.6

4.0

Capital Markets and Financial Risk

Future Resources

6.5

5.4

2

4.8

• Strong rule of law for an emerging-market country • Adaptable economic framework

4.0

10

• Diverse export base

6.6

4.3

Monetary Policy

• Flexible exchange rate policy

Social Cohesion

7.8

• Foreign currency debt is a small portion of general government debt • High level of foreign exchange reserves

Rule of Law

Economic Fundamentals

Strengths:

• Significant development needs

Crisis Management

• History of defaults

4.2 Macroeconomic Indicators

Forward-Looking Indicators 6.6

Summary Brazil has made enormous economic progress in the past 20 years, but the country still faces significant and demanding challenges. Since 1995, political, legal and socioeconomic institutions have become increasingly effective in implementing a successful development strategy.

Given the

country’s volatile political and economic history, the past three administrations emphasized a strong constitutional framework alongside what Brazil calls a socially responsible market economy.

This combination provided not only economic stability, but also enhanced the government’s legitimacy.

However, since 2012 most macroeconomic indicators have deteriorated. The Brazilian government still faces the enormous challenge of trying to bring a larger proportion of its population into the formal sector. This is complicated by significant regional economic differences between the more developed south and

1

the less developed north. The government must deal with sharply skewed income and wealth distribution nationwide.

All in all, Brazil’s progress over the past two decades warrants an investment-grade government bond rating. The country’s large foreign exchange reserves, the much lower dependence of the government on foreign currency debt issuance, and an increasingly vibrant corporate sector are together consistent with Brazil’s BBB+ rating. However, given the downward trajectory of macroeconomic indicators over the past three years, the rating has a negative outlook.

The Economy Despite the global financial crisis, Brazil’s GDP increased by more than US$1 trillion between 2007 and 2011. However, when measured in dollars, GDP has been declining since 2012. Growth in Brazil’s per capita income, measured in dollars, was also remarkable through 2011 but has been falling since 2012. On a purchasing power parity basis, however, per capita income has been rising but at a relatively slow rate.

Brazil successfully navigated the worst part of the global crisis. While the country’s GDP contracted by 0.3 percent in 2009, economic growth rebounded strongly in 2010, when GDP expanded by 7.5 percent, the highest growth rate in more than 20 years. Regulatory improvements in key sectors and a greater reliance on competition helped Brazil’s economic performance, notably in the private health insurance sector. However, recently concerns have been raised about the government’s use of governmentsponsored enterprises (GSEs) to foster

economic reform. The government is running up against growing opposition within the private sector to policies that allegedly use the pricing power of large GSEs, particularly in the financial and energy sectors, to force more competition within the private sector. Also, revelations of widespread corruption at Petrobras, the country’s flagship oil company, pose not just economic risks, but also political risks for the government.

GDP Growth In 2011, GDP growth slowed to 2.7 percent, and in 2012 it slowed further, to a mere 1.0 percent. Growth picked up in 2013, but was still an anemic 2.3 percent and in 2014 the economy grew by a mere 0.1 percent. The slowdown is blamed on two factors: infrastructure constraints and weaker demand for Brazil’s commodities, particularly from China. The latter is a result of China’s own economic slowdown. China plays an important role in Brazil’s economic

success, not only as a major importer of Brazilian products but also by maintaining worldwide demand, which until recently had boosted commodity prices. On top of this, Brazil is suffering from what some are calling a multi-year megadrought, the worst in at least 80 years.

The economically important southeast is the most affected region, with the water shortage in Sao Paulo being particularly severe. This city of more than 11 million people continues to see even its drinking water supplies dwindle. The drought is affecting not just the agricultural sector but also electricity generation, because more than two-thirds of Brazil’s electricity is based on hydropower. Not surprisingly, the Brazilian economy contracted by 1.56 percent in the first quarter of 2015 compared with the same period in 2014.

The Brazilian government is constrained in responding to the slowdown because its own fiscal accounts have registered a deterioration, and any measures to

Real GDP Growth (%) 8 7 6 5 4 3 2 1 0 -1 2008

2009

2010

2011

2012

2013

2014

2015

Brazil | 2

rectify the problems of infrastructure deficiencies — in particular the near-term crisis of water distribution — will take years to implement.

Unemployment Rate (%) 9 8 7

Most forecasts call for an economic contraction of about 1.0 percent in 2015.

However, there is some hope that the economy may start to turn around towards the end of the year as the depreciation of the real is expected to boost exports.

6 5 4 3 2

Employment Brazil poses an interesting problem when looking at unemployment. The unemployment rate has gone up steadily since January 2015, when it registered 4.3 percent. By May 2015 unemployment had risen to 6.4 percent. It should be noted that Brazil’s unemployment statistic is based on the number of people looking for work as a percent of the labor force in only six metropolitan areas. This number is not really comparable to what we would find in advanced industrial countries because a large part of the Brazilian workforce remains in the informal sector.

Brazil’s real employment challenge is to bring more of the population into the formal sector. This will take decades.

Inflation Historically, inflation has always been one of the thorniest issues for Brazil. In the 1990s, the government was forced to freeze the domestic payments system to prevent the economy from spiraling into hyperinflation. It was not until 2003 that the country began what has turned out to be a sustained period of singledigit inflation. Some observers argue that Brazil may have finally broken its tendency towards excessive inflation.

1 0 2008

2009

2010

2011

However, because of the effects of the drought and the sharp depreciation of the real, the inflation rate has been rising.

As measured by the consumer price index (CPI), inflation increased to 6.5 percent in 2011, compared with an average of 5.3 percent in the 2008 to 2010 period. In 2012, the inflation rate reached 5.8 percent. That

2012

2013

2014

2015

was followed by a rate of 5.9 percent in 2013. After slowing during the latter half of 2013, inflation has since been rising at a pretty steady pace. In May 2015, it reached an annualized rate of 8.5 percent, the highest since 2003, and well above the targeted range of 2.5–6.5 percent. Some forecasters are expecting inflation to remain in the 7–8 percent range in 2015.

Inflation - CPI (%) 7 6 5 4 3 2 1 0

2008

2009

2010

2011

2012

2013

2014

Brazil | 3

Financial Deepening Although Brazil’s financial system lacks the depth of those of more developed countries, it has deepened significantly in recent years. For instance, the domestic credit-to-GDP ratio increased from 25.7 percent in 2004 to 56.1 percent by yearend 2013. This represents an important movement forward for Brazil. At the same time, however, the speed of growth in domestic credit is potentially worrisome, especially during an economic downturn.

In most countries, such a sharp rise in credit consumption has usually been associated with rising credit risk. Even in advanced industrial countries, significant increases in credit can easily outpace the ability of financial institutions to analyze the additional credits taken on their balance sheets.

Brazil generally has relatively strong financial supervision. However, as the financial system has become ever more sophisticated and the monetization of the economy continues to grow, the ability to carry out adequate supervision will be severely taxed. In particular, the combination of recent credit growth and declining GDP has created potential banking sector vulnerability.

Balance-of-Payments Constraints The Brazilian economy has traditionally been viewed as constrained by its balance of payments. In other words, whenever the economy grew rapidly, investment needs rose and quickly outstripped domestic savings. This caused large current account deficits. As the deficits grew and foreign currency debt was accumulated, financing future current account deficits became more burdensome. On numerous

occasions, Brazil has faced balance-ofpayments crises, often so serious that the government was forced to reschedule the country’s foreign currency debt. It would not be an exaggeration to label Brazil a serial defaulter.

As is true in many areas of the Brazilian economy, a significant change occurred after the election of President Luis Inácio Lula da Silva. Between 2003 and 2007, Brazil annually ran current account surpluses. However, in 2008 the country started recording current account deficits.

What distinguishes the period from 2008 to the present from Brazil’s earlier record of current account deficits is that the recent strings of deficits, when measured as a percent of GDP, have been relatively low by Brazilian historic standards.

The external debt-to-GDP ratio has been rising steadily. From a low of 14.1 percent in 2009, it is estimated to have reached approximately 24 percent in 2014. Other measures of the country’s external burden have followed a somewhat similar pattern to the external debt-to-GDP ratio.

For instance, the debt service ratio, after falling for a number of years, started to rise again in 2012, reaching 18.2 percent.

In 2013, it rose further to 25.2 percent, and it is likely that the ratio stayed near 25 percent in 2014. Nonetheless, despite the recent rise compared with 2011, Brazil’s debt service ratio is still well below 2005’s figure of 46.7 percent.

Another measure of a country’s debt burden is the debt-to-exports ratio, with exports including all current account receipts. This ratio has been rising steadily since 2012, when it reached 147.9 percent.

It rose further to 162.7 percent in 2013, and

is likely to have reached approximately 170 percent in 2014. A ratio above 200 percent is often a yellow flag of balanceof-payments problems ahead.

The overall deterioration in most of these external indicators is exemplified by the country’s growing nominal current account deficit. In 2012, the deficit was US$54.3 billion. It surged to US$81.1 billion in 2013. The latest data we have from the Banco Central do Brasil shows that the current account deficit for the 12 months through January 2015 totaled US$90.4 billion. In January 2015 alone, the monthly deficit was US$10.7 billion.

Foreign Exchange Reserves Foreign exchange reserves have soared in the past 12 years. In 2002, they were a paltry US$37 billion, but as of June 12, 2015, reserves totaled US$372 billion, among the largest in the world. Despite the high level of international reserves, developments in the overall balance of payments point to a moderately higher level of foreign currency credit risk than in the past.

Fiscal Policy Over the past decade, Brazil’s governments have successfully restored fiscal discipline through the use of fiscal rules, enhanced expenditure controls and a high degree of transparency. The country has a well-established legal framework for the formulation, execution and monitoring of the budget, including a strong focus on the medium term. This helps ensure that fiscal policy measures, in general, are considered affordable and sustainable. As such, the government is now better able to adjust more smoothly to potential fiscal shocks. About two-

Brazil | 4

thirds of primary spending is dedicated to social sectors, including social security.

Two of the most prominent programs have been Bolsa Familia and Fome Zero, one aimed at improving living standards of the poor and the other aimed at ending hunger in Brazil. Both programs have received international praise. Overall, it is estimated that these two programs reach 20–25 percent of the population.

Primary Balance A disciplined fiscal policy had led to ongoing general government primary surpluses, which averaged 3.7 percent of GDP between 2007 and 2011. (This differs from the federal government’s figures, which exclude states and municipalities.) Not surprisingly, given the country’s slowing economy, the general government primary surplus had been declining since 2012, when it fell to 3.2 percent. It declined further in 2013, to 1.9 percent. According to the IMF, the primary balance for the non-financial public sector registered a deficit of 0.6

percent of GDP in 2014. The government is aiming to turn-around that deficit aiming for a primary surplus of 1.2 percent in 2015. The government is also targeting primary surpluses of 2.0 percent for 2016 and 2017. If achieved that will stabilize overall government debt ratios and then hopefully put those ratios on a downward trajectory. A similar pattern is seen when examining general government financial deficits. The deficit was 3.6 percent of GDP in 2011, 4.2 percent in 2012 and 3.9 percent in 2013. But it rose significantly in 2014, reaching 7.9 percent of GDP. This prompted the government to tighten fiscal policy. The IMF forecasts a financial deficit for Brazil of 5.1 percent of GDP for 2015. The debt-to-revenue ratio was an estimated 170 percent in 2014.

Differences in Emerging Market Economies When discussing fiscal policy, it is important to make a distinction between advanced industrial countries and emerging market economies. Advanced industrial countries

General Government Debt to General Government Revenue Ratio 195

The present government is faced with a major corruption scandal at Petrobras, and it will be important to see how far up the political chain the scandal eventually reaches. Besides this, in November the president named a new finance minister, Joaquim Levy, to replace Guido Mantega.

Levy has been vocal in his criticism of past Mantega policies, especially of a special tax break on employer payments to the social security system.

190 185 180 175 170 165 160

are able to carry much more public-sector debt than emerging market countries. The reason is that wealthy countries usually have deep financial markets at home or easy access to such markets in other countries. Another important distinction is that high-income countries usually have more diversified income streams as well as more accumulated assets, either at home or abroad. This is one reason that we compare countries to their income peers.

This is why Brazil’s debt-to-GDP ratio and debt-to-revenue ratios are considered acceptable within its income peer group, despite being well below similar ratios in advanced industrial countries such as Germany or France. For instance, in 2002, when the Brazilian government teetered on the brink of default on its localcurrency-denominated debt, the debt-toGDP ratio was only 62.7 percent with a debt-to-revenue ratio of only 181 percent.

The problem at the time was concern that the policy program of Lula, who had just been elected, might pose an economic and financial risk, which was difficult for markets to estimate. The president subsequently proved market concerns to be mistaken.

2008

2009

2010

2011

2012

2013

2014

2015

Levy has promised to raise taxes, as well as further curtail government spending

Brazil | 5

to slow inflation. In the present global environment, and given Brazil’s particular situation, the government will face real challenges in meeting its targets.

democratic government, an independent judiciary and strong separation of powers with mutual checks and balances.

use its new media outreach capabilities to communicate strategic priorities.

Forward-Looking Indicators (FLI)

Transparency and Accountability Brazil has a strong framework of anticorruption laws, but implementation and effective enforcement remain a problem, especially at the state level. Fighting corruption was high on President Dilma Rousseff’s agenda during her first term in office, when she showed little hesitation in ousting ministers involved in corruption scandals.

In recent years Brazil has achieved rapid social progress, thanks to targeted transfer programs and improvements in labor productivity. Poverty has fallen markedly, from 20 percent in 2004 to 7 percent in 2009, and income inequality overall has decreased. Despite these advances, however, Brazil’s inequality levels remain among the highest in the world. Millions still live in poverty, and social exclusion is structurally ingrained. There are no irreconcilable ethnic, religious or social clashes, but there are still extreme social and regional disparities.

While Brazil has a dynamic and resilient economy, it has recently become entangled in several political scandals that affect its political management.

Although the country scored highly in rule-of-law category indicators such as separation of powers and property rights, it scored low in future-resources categories such as education, social security and institutional learning.

The committee also revised several scores downward in categories like prioritization, stakeholder involvement, political communication, and government efficiency, reflecting the government’s poor management and crisis avoidance capabilities.

While Brazil remains both able and willing to repay its debt, these repeated scandals raise concerns about the nation’s ability to manage crises. Still, several participants noted that Brazil navigates its crises far better than neighbors such as Argentina or Peru. Additional concerns such as high cost of doing business and high taxes (which stifle innovation), ongoing political corruption and unsustainably high entitlements and pension plans caused participants to agree that the situation in Brazil does not look as good as it did in 2012, meriting a lower rating.

Rule of Law Rule of law is generally a strong category for Brazil, which enjoys a constitutional,

Nevertheless, corruption and bribery are still obstacles to doing business in Brazil, and widespread corruption also remains a deep problem in Brazilian society and politics. In 2014, a new corruption scandal of enormous dimensions unsettled the country. Paulo Roberto Costa, a former senior director at Petrobras, confirmed the existence of a kickback scheme at the company. Firms bidding for contracts with Petrobras were obliged to pay bribes.

Unlike her predecessor, Lula, President Rousseff neither has great charisma nor great talent for communication. She is rather regarded as an expert with great technical skills. Nevertheless, as Lula did, Rousseff has used the traditional media to sell Brazilians on her policies. As a consequence of the protests surrounding the 2014 FIFA World Cup in Brazil, the government realized the importance of social media and online networks, which played a key role during the 2014 campaign. As in no other prior election in the country, the 2014 presidential race was marked by particularly aggressive communication and marketing moves. It remains to be seen if the government can

Social Cohesion

In response to the protest movement that persisted through 2013 and 2014, Rousseff always described the demonstrations as legitimate, refused to constrain the right to assembly, and presented herself as open to dialogue, which prevented conflicts from escalating.

While the government has not been able to effectively address the discontent of the protesters, it has endeavored to find solutions.

Future Resources Though Brazil has considerably increased its investment in education, it continues to show dismal results in elementarylevel education in PISA studies. There are broad regional disparities in the quality of education as well as in opportunities for students. The country has also increased its investments in research and development over the last decade, announcing the Business Innovation Plan in 2013 to stimulate private sector investment in innovation.

Brazil | 6

Brazil urgently needs pension reform.

Without it, pension expenditures as a share of GDP are projected to nearly double, climbing to about 15 percent of GDP by 2015. They are the main cause of the rising public deficit today. Public employees may stop working at age 60 for men and 55 for women and still receive pensions averaged to their career salaries.

Brazil still has some time left, but without thorough and fundamental reforms, the pension system could drive the country into bankruptcy in the long-term.

Strategic Capacity The government’s strategic priorities include fighting poverty and inequality, enhancing education, modernizing and enlarging the country’s basic infrastructure, maintaining macroeconomic stability and fostering growth.

At the beginning of her second term in office, Rousseff identified rebuilding the confidence of the private economy, overcoming the growing opposition in her own party and restoring dialogue with the political opposition as the most pressing tasks. She has recognized the need for drastic change and has begun to assemble teams to address these challenges.

Adaptability Brazilian governments have proven to be very adaptable, given their track record of weathering crises through the 1980s and 1990s. Brazil is a strong and active partner in international organizations including the OECD and the World Bank. It values the opportunity to discuss major policy issues and challenges in a multilateral context, and has shown that it can learn from the experiences of countries facing

similar challenges. The government has also undertaken considerable efforts to strengthen human resource capacities in the public service by increasing entrylevel skills and emphasizing innovation and continuous training.

According to Datafolha, in January 2015 only 23 percent of Brazilian adults evaluated the management of the Workers’ Party (Partido dos Trabalhadores, or PT) government as excellent or good, while 44 percent considered it bad or terrible.

This amounted to a significant drop compared with December 2014: At that time, 42 percent rated their government’s management as excellent or good and only 24 percent said that it was poor or very poor.

debt default, hyperinflation and the impeachment of its first democratically elected president, the country’s tendency towards crisis is alarming.

In spite of the frequent crises, state institutions continue to function and the political system is based on a robust constitution that is difficult to amend.

While Brazil’s crisis management capacity can be commended, Brazil must work towards avoiding future crises in order to become more stable and thus merit a higher rating.

Governing Brazil is a complex challenge, not only because of its size and diversity, but also because the constitution tends to overregulate and the number of political parties makes it difficult to form coalitions and implement reform. The need for political reform centers around the electoral system and campaign financing. Rousseff’s 2014 campaign promises included political reform, but little progress has been made in this area in 2015.

Crisis Management Capacity In 30 years of democracy, Brazil has repeatedly shown that it has a great ability to learn and adapt. It has certainly proved itself resilient, but in the country committee, the question of Brazil’s capacity to prevent crises was raised. Although it is beneficial that Brazil has shown an ability to overcome political turmoil, democratic transition,

Brazil | 7

Rating Committee Average Scores by Indicator Macroeconomic Indicators

4.2

Capital Markets and Financial Risks

4.0

Economic Fundamentals

4.3

Domestic Credit / GDP (%)

4.3

Real GDP Growth %

4.0

Domestic Credit (% Change)

3.2

GDP Per Capita

4.0

Overall Strength of Banking Sector

4.4

Real Exports (% Change)

4.3

External Sector

3.9

Real Imports (% Change)

4.5

Current Account

4.0

Gross Domestic Investment / GDP (%)

4.1

External Debt

3.8

Gross Domestic Savings / GDP (%)

3.9

Inflation-CPI (%)

4.8

Forward Looking Indicators

6.6

Population Growth (% Change)

4.8

Political Economic and Social Stability

6.7

Public Sector / Fiscal Policy

4.0

Rule of Law

7.8

General Government Debt / GDP (%)

4.2

Legal Certainty

7.6

Nominal GDP Growth (Local Currency %)

4.2

Independent Judiciary

7.5

Separation of Powers

7.6

Property Rights

8.3

Transparency / Accountability

6.6

Corruption Prevention

5.0

Independent Media

8.0

Civil Society Participation

6.7

General Government Debt / General Government Revenue (%) General Government Interest / General Government Revenue (%)

4.1 4.1

General Government Primary Balance / GDP (%)

4.1

General Government Fiscal Balance / GDP (%)

3.9

General Government Revenue / GDP (%)

4.1

General Government Expenditure / GDP (%)

3.4

Monetary Policy

4.8

Accommodative Monetary Policy

4.8

Brazil | 8

Social Cohesion

6.5

Implementation

6.3

Social Inclusion

6.0

Government Efficiency

6.1

Trust in Institutions

6.3

Resource Efficiency

6.5

Societal Mediation

7.1

Adaptability

6.5

Conflict Management

6.5

Policy Learning

6.7

Future Resources

6.0

Institutional Learning

6.4

Education

6.0

Crisis Management

6.3

Research and Innovation

6.2

Historical Evidence of Crisis Management

6.4

Employment

6.7

Crisis Remediation

6.0

Social Security

4.9

Signaling Process

6.4

Environmental Sustainability

6.3

Timing and Sequencing

6.6

Steering Capability and Reform Capacities

6.4

Precautionary Measures

6.2

Strategic Capacity

6.6

Automatic Stabilizers

6.3

Prioritization

6.5

Policy Coordination

6.7

Stakeholder Involvement

6.6

Political Communication

6.7

Brazil | 9

macroeconomic indicators I. Economic Fundamentals

2008

2009

2010

2011

2012

2013

2014

2015

Nominal GDP Growth (%)

13.9

6.8

16.4

9.9

6.3

8.6

8.9

8.6

Real GDP Growth (%)

5.2

-0.3

7.5

2.7

1.0

2.3

2.4

1.4

Unemployment Rate (%)

7.9

8.1

6.7

6.0

5.5

5.4

5.5

6.1

Real Exports, Goods (% Change)

23.2

-22.7

32

26.8

-5.3

6.3

-0.4

9

Real Imports, Goods (% Change)

43.5

-26.2

43.3

24.5

-1.4

9.7

5.9

8.3

Nominal GDP (bn. US$)

1653.5

1622.3

2142.9

2474.6

2247.7

2246.0

2244.1

2356.8

GDP per Capita (US$)

8633.2

8382.1

10961.3

12536.3

11281.5

11172.5

11067.5

11527.4

GDP per Capita (PPP basis: US$)

12809

12752.8

12759

14300.7

14580.9

15037.5

Inflation - CPI (%)

5.7

4.9

5.0

6.5

5.8

5.9

6.3

Population Growth Rate (% Change)

1.1

1.0

0.9

0.9

0.8

Gross Fixed Capital Formation / GDP (%)

19.1

18.1

19.5

19.3

18.2

18.2

18.8

19.7

Gross Domestic Savings / GDP (%)

20.9

17.7

19.2

19

16.1

15.4

15.2

16

II. Public Sector Policy

2008

2009

2010

2011

2012

2013

2014

2015

66.8

65

64.7

68

68.2

68.6

68.1

General Government (GG) Debt / GDP (%) GG Revenue / GDP (%)

36.7

34.8

37.1

37.0

38.1

37.9

38.2

37.9

GG Expenditure / GDP (%)

38.3

38.1

39.9

39.6

40.9

41.1

42.1

41.0

Brazil | 10

GG Financial Balance / GDP (%)

-2

-3.3

-2.5

-2.6

-2.5

-3.3

-3.4

-3.1

Primary Balance / GDP (%)

3.9

2.0

2.4

3.1

2.1

1.9

1.3

2

GG Debt / GG Revenue (%)

172.7

191.9

175.1

175.0

178.9

174.9

172.4

173.3

GG Interest / GG Revenue (%)

14.4

15.2

14.0

15.4

12.9

12.1

12.8

12.9

2008

2009

2010

2011

2012

2013

2014

2015

20.3

14.8

16.9

9.6

12.1

III. Capital Markets & Financial Risk Domestic Credit Growth (YOY) Domestic Credit / GDP (%)

IV. External Sector Current Account Balance / GDP (%)

96.9

93.1

96.3

100.5

110.8

110.1

2008

2009

2010

2011

2012

2013

2014

2015

-1.7

-1.5

-2.2

-2.1

-2.4

-3.6

-3.5

-3.6

Sources: OECD, World Bank, IMF, Author’s Calculations

Brazil | 11

About the Bertelsmann Foundation The Bertelsmann Foundation, established in 2008, is the North American arm of the Germany-based Bertelsmann Stiftung. The Foundation is a think tank that spurs debate and discussion on political, economic and social issues and it is committed to promoting the freedom of individuals and societies and international understanding. The Bertelsmann Foundation develops, creates, and implements its own projects and programs. The Bertelsmann Foundation develops “Global Ideas and Transatlantic Action” and we serve as an international window in the US capital, providing a showcase for global best practices and a venue for thought leaders to exchange ideas for confronting society’s greatest challenges.

The INCRA project was launched at the Bertelsmann Foundation’s 2012 Annual Financial Conference, which has developed a reputation for being the go-to event on the sidelines of the International Monetary Fund World Bank Group Spring Meetings. The Bertelsmann Foundation sees INCRA as an important contribution to the debate and discussion on new rules for international financial- and economic-policy governance. Therefore, the Foundation seeks to explore and support all avenues to turn the INCRA concept into reality.

About INCRA The Bertelsmann Foundation developed its INCRA (International Non-profit Credit Rating Agency) proposal following the 2008 financial crisis and the subsequent criticism of the practices of the leading credit rating agencies. The INCRA blueprint presents a new model, both in its institutional setup and its methodology, for developing a credit rating agency to assess sovereign risk in an alternative way. INCRA is based on an operational business model funded by a sustainable endowment.

Since publishing the original model for INCRA the Bertelsmann Foundation has assembled a team of international sovereignratings experts to produce sovereign ratings based on INCRA’s transparent methodology. INCRA has developed a comprehensive new methodology that evaluates a country’s ability and willingness to repay its debt. In its sovereign debt assessments INCRA uses forward-looking indicators in addition to traditional macroeconomic data. These indicators are highly qualitative, mirror a country’s socioeconomic development and include factors like governments’ crisis management and reform capacities as well as investments in education and infrastructure. INCRA defines sovereign ratings as “public goods”, available to all citizens and correspondingly all detailed rating reports are available online for free.

Contact Annette Heuser, Bertelsmann Foundation, (202) 384-1990 annette.heuser@bfna.org Anneliese Humpert, Bertelsmann Foundation, (202) 384-1995 anneliese.humpert@bfna.org Bertelsmann Foundation North America, 1101 New York Ave NW, Suite 901, Washington, DC 20005 www.bfna.org www.incraglobal.org

Brazil | 12