SAO PAULO & RIO DE JANEIRO--()--In Fitch's opinion, a broader planning framework for subnational borrowing is still lacking in Brazil. Analysis of repayment capacity, multiplier effects in the regional economy, underlying risks, and federal debt limits should also be considered as part of the process of authorizing new loans.
In 2012, the federal government allowed 21 Brazilian states to borrow an additional BRL58.3 billion (USD29.1 billion) in debt, representing roughly 14% of total outstanding debt with the federal government. Significant investment needs that exceed the states' financing capacity and are not suitable for or able to attract private investors will drive up subnational debt in Brazil in the coming years. Fitch expects that subnational financing will increasingly be provided by both international and national private banks.
In Fitch's view, the approval of new debt should be made public when authorization is granted. In contrast to other countries, subnationals in Brazil do not have earmarked funds dedicated to the repayment of financial debt. In order to promote orderly growth of subnational debt, Fitch believes that the internal ratings assigned by the federal government to the subnational as well as the loan agreements should be in the public domain.
The criteria used by the federal government to authorize new debt are not transparent. The highly indebted state of Sao Paulo can increase its debt level by 6.6% or BRL11.9 billion. Other states in the Northeast region that obtained permission to raise new debt are highly dependent on federal transfers as a revenue source. Fitch believes that unless these funds are channeled to investment, the new debt could pose a threat to the financial profiles of many states, since they are relatively highly indebted and have already committed a significant proportion of revenues to meet interest payments.
Foreign private banks operating in Brazil disbursed USD2.5 billion to three states in 2012. These states used the proceeds to repay some debt owed to the federal government. Subnationals have traditionally relied on loans provided by state-owned institutions, multilaterals, and supranational agents in maturities of over 10 years. However, these traditional creditors are approaching their lending limits.
For more information, please see the special report 'The Redevelopment of Subnational Borrowing in Brazil' available at 'www.fitchratings.com'.
Additional information is available at 'www.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.
Applicable Criteria and Related Research: The Redevelopment of
Subnational Borrowing in Brazil