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Fitch Affirms State of Sao Paulo's IDR at 'BB'; Outlook Negative
July 20, 2017 / 8:24 PM / 4 months ago

Fitch Affirms State of Sao Paulo's IDR at 'BB'; Outlook Negative

(The following statement was released by the rating agency) SAO PAULO, July 20 (Fitch) Fitch Rating has affirmed the Long-Term Issuer Default Rating of the Brazilian state of Sao Paulo (IDR) at 'BB'. The Outlook is Negative, reflecting the Negative Outlook of the sovereign. The ratings of Sao Paulo are capped by the Brazilian sovereign. Fitch has also affirmed Sao Paulo's National long-term rating at 'AA(bra)'/Stable Outlook. See the full list of rating actions at the end of this release. KEY RATING DRIVERS The affirmation of the state of Sao Paulo's ratings reflects its strong economy, which accounts for about one-third of the Brazilian GDP. The ratings are based on an adequate fiscal performance when compared to Brazilian state peers in the same rating category with better fiscal autonomy. The ratings are also underpinned by the fact that Sao Paulo's most important creditor is the federal government. Contrary to Fitch expectation, Sao Paulo has been able to sustain operating margins close to 5%. In 2016, operating margins reached 6.2%. This reflects the state's ability to keep operating expenditure under control even during severe economic conditions. According to Fitch, the state should be able to generate margins of around 5% until 2019, provided the national economy recovers. Fitch expects Brazil to deliver mild economic growth in 2017 (0.5%), which should translate into 3.4% growth in the state's tax collections. Fitch notes that the state benefits from above-average fiscal autonomy, since tax collections represented 69.9% of operating revenues in 2016. The prolonged economic recession in the last four years has translated into a poor performance in tax collections, especially for Sao Paulo, whose economy is more influenced by the industrial sector, which accounts for 1/3 of the state collected Imposto Sobre Circulacao de Mercadorias e Servicos (ICMS) tax. Given the reduction in credit approvals since 2015, Sao Paulo's financial debt decreased in 2016. Direct debt over current balance dropped to 3.6 years from 7.6 years registered in 2015, also reflecting a lower amount of debt in foreign currency, which corresponded to 6.5% of total debt (12.1% for the average of 27 Brazilian states). Operating as a cash-based fund, the annual financial shortage of the local pension system increased 7.1% in 2016 (6.3% official inflation), reaching BRL17.110 billion, or 8.3% of the state's operating revenues. Sao Paulo has not raised the contribution rate of employees, which is currently at the equivalent of 11% of their salaries. Fitch acknowledges that pension payments have formed a significant portion of personnel expenditures (38.4% in 2016). Fitch considers Sao Paulo's liquidity as adequate, with no short-term concerns. There was a reduction in the amount of unpaid commercial short-term liabilities to 5.3% of operating revenues in 2016 (8% in 2015). The short-term obligations are mainly composed of personnel payments and investments. Outstanding cash of BRL23.543 billion covered 69.9% of the state's obligations due in 2017. RATING SENSITIVITIES Rating Actions Linked to the Sovereign: Any rating action affecting the Federative Republic of Brazil, currently rated 'BB'/Negative, will exert a direct impact on Sao Paulo's ratings. Fiscal Performance and Debt: A significant and consistent deterioration in operating margin coupled with a higher level of financial debt expressed by a direct debt exceeding 10 years of the current balance could generate negative pressure on Sao Paulo's ratings. KEY ASSUMPTIONS --Fitch assumes a higher level of sovereign support for Sao Paulo in comparison to that apparently granted to other Brazilian states even considering the weak institutional framework, given that Sao Paulo's most relevant creditor and guarantor is the federal government, in addition to the state's prominent economic position in the country; --Fitch expects to see some progress on the government's legislative agenda especially the items affecting subnationals such as pension reform and additional federal debt relief. The full list of rating actions is as follows: State of Sao Paulo: --Foreign Currency Long-Term IDR affirmed at 'BB'; Negative Outlook; --Foreign Currency Short-Term IDR affirmed at 'B'; --Local Currency Long-Term IDR affirmed at 'BB'; Negative Outlook; --Local Currency Short-Term IDR affirmed at 'B'; --National Long-term rating affirmed at 'AA(bra); Stable Outlook; --National Short-term rating affirmed at 'F1+(bra)'. Contacts: Paulo Fugulin Director +55 11 4504-2206 Fitch Rating Brasil Ltda. Alameda Santos 700 Sao Paulo, Brazil Alfredo Saucedo A. Director +52 81 8399 9100 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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