SAO PAOLO & BOGOTA, Columbia--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for the State of Rio de Janeiro (ERio):
--Foreign Currency Long-term rating at 'BBB-'; Stable Outlook;
--Foreign Currency Short-term rating at 'F3';
--Local Currency Long-term rating at 'BBB-'; Stable Outlook;
--Local Currency Short-term rating at 'F3';
--National Long-term rating at 'AA(bra)'; Stable Outlook
--National Short-term Rating at 'F1+(bra)'.
Estado do Rio de Janeiro's (ERio) ratings consider its slow improving budgetary performance and operating margin, which reached 6.1% in 2011. Its industrial sector has benefited from recent investments in infrastructure and could represent 15% to 17% of ERio's GDP in 2014. Fitch does not expect to see significant changes in its budgetary performance in the coming quarters.
ERio has reviewed its budget planning in light of the challenging economic environment affecting mostly the vehicle, textile and pharmaceutics sectors. In 2011, tax collections over products and services (ICMS) grew only 2.6%, lower than the average of the nine larger Brazilian states (6.6%). Nevertheless, ERio has intensified its collection efforts from large companies, which translated into a relatively higher growth in 2012 (23.7% versus 21.7% in 2011).
ERio displays a high debt burden (BRL65.4 billion as of June 2012), corresponding to 117.3% of current revenues in 2011. As per the Fiscal Responsibility Law (FRL), indebtedness is limited to 2.0x net current revenues. This ratio reached 1.4x as of April 2012, one of the highest among its subnational peer group in Brazil. After the renegotiation agreement in 1999, the federal government became ERio's main creditor, corresponding to 90.3% of total debt.
The federal government allows ERio to capitalize its interest on the outstanding amount. The current administration has adopted a strategy to optimize fiscal performance, thus enhancing ERio's flexibility in its long-term debt repayment schedule (due 2029). As the portion of federal government debt diminishes, the financial flexibility reduces proportionately.
The capacity to meet debt service payments is affected by the state's budgetary performance and tight fiscal limits for debt service, which leads to the maintenance of a high outstanding amount of debt. ERio has been in compliance with the FRL since 2000, which allowed the state to raise an additional BRL8.1 billion. Fitch believes that further increases in debt could pressure its fiscal sustainability.
Despite reducing ERio's proprietary pension system (Rioprevidencia), the actuarial deficit totaled BRL46.6 billion in 2011 (BRL55 billion in 2010). As an autarchy, Rioprevidencia covers roughly 206,000 beneficiaries and receives contributions from active employees in addition to oil royalties. If the recently adopted corrective measures (segregation of funds and adoption of a complementary pension system) do not suffice to cover the actuarial deficit, there could be a resultant negative impact on ERio's budgetary performance.
The ratings would benefit from a decline in the overall indebtedness levels and a larger tax contribution base. Further increases in expenditures or inability to compensate for decreasing oil royalties could deteriorate ERio's operating performance, thus leading to a negative rating action. Fitch would also review the ratings if operating margin (operating balance over operating revenue) falls below 5%.
ERio is the second largest economy with prevalent oil production and reserves. ERio is close to the most important economic center, Sao Paulo. The services sector represented 62.3% of the state's output in 2009.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Tax-Supported Rating Criteria (August 2012);
--Local and Regional Governments Rating Criteria (April 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
International Local and Regional Governments Rating Criteria - Outside the United States
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684304
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.