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Fitch: Brazil State Fiscal Aid Uncertain Amid Political Turmoil
May 24, 2017 / 3:04 PM / 7 months ago

Fitch: Brazil State Fiscal Aid Uncertain Amid Political Turmoil

(The following statement was released by the rating agency) SAO PAULO/NEW YORK, May 24 (Fitch) The political turmoil surrounding Brazil's President Michel Temer could damage state credit profiles if it delays emergency federal support for large states and slows the passage of federal laws that would relieve state pension pressures, Fitch Ratings says. In recent negotiations with its most fiscally stressed states, Brazil's federal government agreed to grant direct financial support in exchange for lowering operating expenditures, including the amount that employees, retirees and pensioners contribute to the state pension system, and privatizing state-owned enterprises. Rio de Janeiro was the first state to enter negotiations and Minas Gerais and Rio Grande do Sul followed. The federal plan could have a positive near term impact, but political uncertainty will probably slow its implementation. The plan's federal credit lines would allow states to pay back-salaries for critical services like law enforcement and healthcare in addition to past-due commercial debt. However, delays in these plans could reduce some of their benefits, such as higher tax collections and control over discretionary expenditures. Delaying proposed pension relief would also be fiscally damaging for the states as pension cost increases have expanded their budgetary structural imbalances. Total tax collections in Rio de Janeiro, Minas Gerais and Rio Grande do Sul grew by an average 7.7% per year from 2011 to 2015. Their pension expenses rose by 16.4% over the same period. <iframe allowfullscreen src="//e.infogr.am/eaaf5088-4929-49da-9a06-a330a8306636?src=embe d" title="Brazil State Expenses" width="550" height="649" scrolling="no" frameborder="0"> Delaying these programs could also damage the overall economy, which is concentrated in four states. Sao Paulo's economy, with a GDP of USD571 billion in 2016, accounts for one third of Brazil's economy. We expect macro conditions to improve in 2017, compared to 2016 and 2015, but the recovery will be slow. Fitch forecasts the Brazilian economy to grow by 0.7% this year. Fitch expects the fiscal performance of Brazilian states and local governments to also improve by a small margin in 2017. Operating margins for the portfolio average of 12 rated states and municipalities should improve to 3.3% in 2017 from 2.8% in 2016. Our view assumes the adoption of some corrective measures, including the benefits derived from increased tax tariffs on key economic segments, lower tax incentives to companies and an increase in the contribution rate of employees to the local pension systems. We do not expect Rio de Janeiro, Minas Gerais and Rio Grande do Sul to generate enough revenues to cope with operating costs in 2017. Therefore, these states will need to resort to one-off revenues such as judicial deposits, taxation on repatriated assets and mostly emergency credit lines. Contact: Paulo Fugulin Director, International Public Finance +55 11 4504-2206 Fitch Ratings Brasil Ltda. Alameda Santos 700 - 7 andar, Cerqueira Cesar Sao Paulo, Brazil Humberto Panti Garza Senior Director, International Public Finance +52 81 8399-9100 Fitch Mexico S.A. de C.V. Prol. Alfonso Reyes No. 2612, Edificio Connexity, Piso 8 Col. Del Paseo Residencial Monterrey, Mexico Robert Rowan Senior Analyst, Fitch Wire +1 212 908-9159 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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