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TEXT-S&P affirms State of Rio de Janeiro
July 2, 2012 / 8:36 PM / 5 years ago

TEXT-S&P affirms State of Rio de Janeiro

     -- The strengthening in the administration and the national Fiscal 
Responsibility Law are expected to sustain the state of Rio de Janeiro's sound 
fiscal performance during the next three years despite an ambitious investment 
     -- Debt levels will remain above 100% of revenues; however, low fiscal 
deficits are expected.
     -- We are affirming our 'BBB-' global scale and 'brAAA' national scale 
ratings on the state of Rio de Janeiro.  
     -- The stable outlook reflects the state's growing ability to maintain 
its increasing public investment program.

Rating Action
On July 2, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' global 
scale and 'brAAA' national scale issuer credit ratings on the State of Rio de 
Janeiro (SRJ). The outlook on these ratings remains stable.

The strong economy in SRJ continues to support the ratings. SRJ's estimated 
per capita GDP (of about $15,500) is about 25% higher than that of Brazil, and 
the state has a well-diversified economic structure, with services accounting 
for about 60% of the its GDP. 

However, public debt, which remains high at about 122% of total revenues at 
the end of 2011, constrains SRJ's credit quality. While debt to revenues, 
which was about 200% in 2002, is steadily declining, the state's current plans 
to increase its borrowing during the next two-three years to finance 
large-scale infrastructure projects will moderate this downward trend.

Nevertheless, because the federal government holds about 92% of this debt, 
SRJ's rollover risk is significantly reduced. The state benefits from the 
favorable terms of this debt, which include a fixed interest rate of 6%, 
denomination in local currency, and monthly installments that will run until 
2038. In addition, Brazil's intergovernmental framework limits the ratio of 
debt service to net revenues (a specific formula that subtracts transfer to 
municipalities, among other things) to 13%. Still, this debt is indexed to the 
country's inflation indicator (Indice General de Precos - Disponibiliade 
Interna) that has run above Brazil's general consumer price index in recent 
years, leading to a higher debt despite the state's only limited access to new 
debt in recent years. Due to the prohibition for Brazilian local and regional 
governments to issue debt on capital markets, most of SRJ's new debt--related 
to infrastructure for the 2014 World Cup and the 2016 Olympic Games--will 
consist of credit lines from multilateral agencies (such as the World Bank), 
international agencies (such as the French Development Agency) and the 
Brazilian Development Bank (BNDES). Additional transfers from the federal 
government will also contribute to the financing of the infrastructure in the 
state. We expect SRJ to maintain its improved credit quality amid these 
significant investment projects. This stems from a strengthening in the 
state's fiscal management and the strong anchors provided by the national 
Fiscal Responsibility Law (such as the limits on payroll expenses and the 
prohibition to finance operating deficits).

The state's fiscal flexibility stems from generating 89% of its revenues from 
its own sources. However, its spending flexibility remains narrow. Capital 
expenditures still account for only 9% of the total spending in 2011, and even 
slipped from the 2010 level of 10.8%. Although this ratio is expected to rise, 
the constraint on its spending--due to increasing demands for investments in 
infrastructure and social spending--will continue to put pressure on the 

On average, available cash fully covers suppliers' debt every year. SRJ's 
authorities are currently working under the liquidity guideline that minimum 
cash levels should equal one and a half months of payroll expenses, down from 
two months in the past. We do not foresee any material deterioration in the 
state's liquidity.

The stable outlook on SRJ is based on our expectations that the state will 
gradually continue to strengthen its fiscal and financial indicators amid an 
ambitious infrastructure development agenda and high social needs. If the 
current administration continues executing its capital expenditures plan in a 
timely manner while strengthening its fiscal and debt indicators during the 
next 12-24 month, we could raise the ratings. Conversely, slippage on the 
implementation of the infrastructure plan or a setback on the recent 
improvements in fiscal performance could put downward pressure on the ratings.

Related Criteria And Research
Methodology For Rating International Local And Regional Governments, Sept. 20, 

Ratings List
Ratings Affirmed

Rio de Janeiro (State of)
  Issuer credit rating
   Global scale            BBB-/Stable/--
   National scale          brAAA/Stable/--

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