SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Brazilian State of Parana's ratings at 'BBB-'. Fitch has also affirmed the national long-term rating at 'AA+(bra)'. The Rating Outlooks are Stable.
Fitch affirms the following ratings:
--Foreign currency long-term Issuer Default Rating (IDR) at 'BBB-'; Stable Outlook;
--Foreign currency short-term IDR at 'F3';
--Local currency long-term IDR at 'BBB-'; Stable Outlook;
--Local currency short-term IDR at 'F3';
--National long-term rating at 'AA+(bra)'; Stable Outlook;
--National short-term rating at 'F1+(bra)'.
KEY RATING DRIVERS
The ratings assigned to the State of Parana (Parana) reflect its stagnant fiscal performance with operating margins close to 4%. In Fitch's opinion, Parana's operating margins have reached the bottom of the cycle in 2013 with higher than expected personal expenditures as observed with many other subnationals. The ratings also factor in its moderate economic importance as the fifth-largest state in Brazil, its proprietary pension system converging to balance, and the financial flexibility stemming from Parana's most important creditor - the federal government, which accounted for 68.6% of total debt in September 2013.
Parana implemented several measures in 2013 to reduce its growing personnel expenditures. These should surpass the 60% limit of net current revenues, thus pressing the operating margins. Fitch believes these corrective measures, such as the reduction of employees indicated by political heads, may not lower expenditures to acceptable levels in the short run. The state faces pressure to improve the quality of law enforcement and equalize wages across critical segments. In Fitch's opinion, the political cost associated with the reduction in personnel expenditures is high, especially during government transitions to occur in October 2014.
As a result of non-compliance with the personnel expenditure limit of 60%, established in the refinance agreement with the federal government in 1998, Parana has not been authorized to enter into credit operations, except for a loan with the World Bank up to USD350 million. As a result, Parana debt metrics should remain fairly stable after reaching 4.9x of its current balance in 2012. With positive effects on investment levels, the new credit agreements also could translate into financial savings, if used to pay down existing debt.
Compensating for its low level of self-financed capex (4.5% of total expenditures in 2012), Parana has implemented several measures to foster private investments under the scope of 'Parana Competitivo'. Parana estimates there was BRL25 billion in investments carried out by private investors, with 41.3% operative as of January 2014. These investments are likely to translate into higher economic growth and job creation as projects become operational. The investment maturity pace is undermined by logistics and workforce bottlenecks.
The consolidated financial performance of Parana's pension funds is positive, with an annual surplus that should reach BRL4 billion in 2013. Nevertheless, according to the report issued by the federal pension authority, one fund (Fundo Financeiro) managed by Parana Previdencia, the state's proprietary pension system, had an actuarial deficit of BRL195.1 billion in 2012. This is equivalent to 7.4 years of Parana's current revenues, lower than 10.9 years posted by Santa Catarina but higher than Rio de Janeiro's (five years). The actuarial deficit must be solved over the long run.
RATING SENSITIVITIES
Downgrade Factors: Any inability to control expenditures that results in operating margins falling below 4% coupled with an increase in financial debt levels could contribute to a negative rating action.
Upgrade Factors: Unlikely in the short term, operating margins above 10% could lead to a positive review of the ratings.
Parana is accounts for 5.8% of Brazilian GDP in 2012, according to the Brazilian bureau of statistics. The services sector is prevalent (64% of GDP), and the state is a relevant national producer of soft commodities.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'International Local and Regional Governments Rating Criteria' (April 2013).
Applicable Criteria and Related Research:
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=823551
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