Fitch: Brazilian State Budgets Have Few Options to Close Gaps
04 March 2015 - 7:09AM
Business Wire
Many Brazilian state operating margins will erode over the near
term, Fitch Ratings says. States spent in excess of their budgets
in 2014 due to the general elections held last October. We believe
spending cuts will be politically challenging, tax increases are
reaching their limits, and using pension systems' assets to cover
current expenditures is adding to the risk.
The states' expenses are showing significant rigidity and the
measures proposed to streamline some state overheads are facing
enormous opposition. Protests have forced the legislative chambers
to defer any decision on these measures. Steps they can take,
including closing down departments and reducing temporary
employees, are not sufficient to curb expenditures. We expect
payments to state contractors to be delayed and their agreements to
be reviewed more often. We also believe the obligations linked to
public private partnerships, signed in previous years, may be
delayed.
Revenues are also facing pressures. Brazil's economic slowdown
is worse than many expected and has heightened many private
investors' risk aversion to the region. The continued drought is
likely to force water rationing, particularly in Sao Paulo
(BBB/AA+(bra)/Stable). Oil royalties have declined. The state of
Rio de Janeiro (BBB-/AA-(bra)/Stable) is the most exposed to those
declines.
In our view, state tax increases may be risky. Fuel tax
increases will go into effect in April. However, the size and
availability of the grey market makes tax collection on other parts
of the economy difficult. Some sources estimate the informal
economy is as high as 30% of total output.
We expect a few states to consider using pension reserves to
satisfy current expenditures. Minas Gerais did so during financial
turbulence in the mid-2000s. Parana (BBB-/AA+(bra)/Stable) has
announced plans to do so. The state's pension system,
ParanaPrevidencia, reported some BRL8 billion (USD2.8 billion) of
liquid assets in 2014. As the state is responsible for pension
payment, it argued that it could use those assets to partially
cover for the financial obligations.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
Applicable Criteria and Related Research:
Sao Paulo, State of
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749662
Rio de Janeiro, State of
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=785068
Parana, State of
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=731478
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,
RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM
THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY,
CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER
RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE
OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD
ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE
ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Fitch RatingsPaulo FugulinDirectorInternational Public
Finance+55 11 4504-2206Alameda Santos, n 700Sao Paulo,
BrazilorCarlos Vicente RamirezSenior DirectorInternational Public
Finance+57 1 347 4573Calle 69 ABogota, ColombiaorRob RowanSenior
DirectorFitch Wire+1 212 908-915933 Whitehall StreetNew York,
NYorMedia Relations:Elizabeth Fogerty, New York, +1
212-908-0526Email: elizabeth.fogerty@fitchratings.com