Rio de Janeiro State Slammed With Two-Notch Downgrade by Fitch

Rio de Janeiro state received a two-notch credit rating downgrade from Fitch Ratings after it failed to make good on international debt obligations and as its liquidity deteriorates rapidly.

Fitch cut Rio’s rating to B- from B+, saying in a statement that “pension payment should consume an increasing portion of the state’s revenues at least in the following 10 years” and that Rio has been “resorting to nonrecurring revenues to cover for operating expenditures.”

Rio now has the lowest credit rating among all five Brazilian states and two cities that Fitch rates publicly. Fitch’s outlook for the rating is stable, reflecting that the state “has reached the bottom” with no future downgrades expected in the short-term, Fitch analyst Paulo Fugulin said by phone.

The state that will host to the Summer Olympics in less than two months has seen its fiscal capacity hurt by rising pension obligations and falling oil prices that have reduced royalties. The result has been repeated belt-tightening measures. The latest round came last Thursday, when the administration announced the elimination of five secretariats along with plans to sell state properties including an island that features the governor’s summer residence.

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Seeking debt relief, some Brazilian states including Rio have appealed to the Supreme Court in order to pay simple rather than compound interest on debts owed to the Treasury. Meantime they’re in negotiations with the federal government to reach a debt solution. Acting President Michel Temer’s government is also working on a proposal to reform the pension system.

“We see as positive factors reforms in the pension scheme and broader renegotiation of the federal debt portion Rio and other large states carry,” Fugulin said. “So only the federal government can solve the problem, not the states right now.”

The government has also sought to provide financial relief to oil-producing states by allowing them to take out billions of reais in loans with state banks. Rio is renegotiating more than 500 million reais in debts with private banks, Estado de S. Paulo newspaper reported Wednesday.

Rio projects a 20 billion reais ($5.7 billion) deficit this year, of which about three-fifths corresponds to the pension system. Oil royalties this year are projected to be 3.8 billion reais -- less than half the levels in 2012-2014 -- raising uncertainty about the state’s ability to provide basic services for the population.

“There’s an effort to keep things running smoothly in Rio, but the deterioration is such that I don’t know if there will be that same commitment once the Olympics are over,” Jorge Arbrache, who until May was chief economist at the federal government’s Planning Ministry, said in an interview last month.

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