SAO PAOLO & BOGOTA, Colombia--(BUSINESS WIRE)--Fitch Ratings has affirmed the State of Rio de Janeiro's (ERio) ratings at 'BBB-' and 'AA(bra)'. The Rating Outlook is Stable.
The complete rating actions are as follows:
--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)'.
KEY RATING DRIVERS
ERio's ratings are based on the state's rather diversified economy and high debt burden. This high debt burden compromises a relevant portion of the city's expenditures. Fitch believes that ERio is able to sustain operating margins close to 5% after posting 5.1% in 2012, which was negatively affected by stagnant level of federal transfers.
Fitch notes that ERio's personal expenditures should grow higher than tax revenues in 2013, as they will be heavily influenced by pension-related payments. In an attempt to mitigate the impact on ERio's cost structure, the state's proprietary pension system sold the equivalent of BRL2.3 billion in oil royalties worth of receivables in June 2013.
The ratings also consider the fact that the Federal Government remains the prevalent creditor, corresponding to 81.7% of the state's total debt of June 2013. The prevalence of the federal debt portion provides the state with implicit financial flexibility, as evidenced by the ongoing discussion to change the index over this portion. If passed by the Senate, the Complementary Law Project 238/2013 could translate into the reduction of the accrued unpaid amount owed to the Federal Government.
The capacity to meet debt service payments is also affected by both the state's budgetary performance and its tight fiscal limits for debt service, which has led to the maintenance of high outstanding debt and generation up to 2011 of accrued unpaid debt.
The Federal Government has allowed ERio to raise an additional BRL7.05 billion. If these funds are not channeled toward completing already planned investments in due time, Fitch believes this new debt could pressure the state's fiscal sustainability in the coming years.
Although some corrective initiatives were adopted few years ago to improve its pension's actuarial deficit, ERio is still allocating large amounts of resources to its proprietary pension system, even with tight pressure on their budget. The actuarial deficit of its proprietary pension system (Rioprevidencia) diminished slightly in 2012, reaching BRL36.3 billion (BRL46.6 billion in 2011).
RATING SENSITIVITIES
Upgrade Factors: Despite being constrained by the increased debt levels, the ratings could benefit over the medium term from an overall improvement in budgetary performance coupled with a larger tax-contribution base. A decline in the indebtedness levels could positively affect the ratings.
Downgrade Factors: The ratings could be reviewed should ERio suffer from any adverse change in its regulatory environment such as - but not limited to - changes in oil royalty regulation and dynamics, or inability to fund the imbalances of its pension system.
The State of Rio de Janeiro is the second-largest subnational economy in Brazil with prevalent oil production and reserves and is close to the most important economic center, Sao Paulo.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria (August 2012)
International Local and Regional Governments Rating Criteria (April 2013)
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704438
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805348
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