SAO PAULO--(BUSINESS WIRE)--The implementation of public policies to promote decentralized social economic development and the president's veto of an idea to create new cities are positive for Brazilian credit quality, Fitch Ratings says.
The creation of new cities could have led to increased administrative costs, which would be mostly financed by higher government borrowing. Also, the federal discussion necessary to create and sustain a well defined strategy for municipal budgetary performance improvement has not occurred.
As in most Latin American countries, major cities in Brazil face population pressure due to continued migration from rural areas and smaller cities to larger urban areas. These pressures increase the demand for local infrastructure, health, and other basic services while heightening the need for large capital expenditures and public policy coordination among different government branches. The preparation for the World Cup this June has spurred significant capital expenditures, especially in urban mobility projects in the 12 cities selected as sites of matches, deepening regional inequality.
Brazil's 27 capital cities generate some 33.7% of the Brazilian GDP and house almost one fourth of the country's population, according to the Brazilian Institute of Geography and Statistics. The six largest cities are highly concentrated and account for 24.5% of GDP. State capitals and the largest cities are in much better fiscal condition to deal with macroeconomic challenges than smaller cities and even some states. With a few exceptions, those large cities are moderately indebted.
Fitch also notes that, apart for the largest cities of Sao Paulo and Rio de Janeiro 'BBB'/'AA+(bra)', fiscal autonomy of Brazilian cities is low. The vast majority of the country's 5,565 cities depends on federal and state transfers to meet their current expenditures. While individual arrangements can vary, Brazilian cities are generally in charge of elementary education and public transportation while also providing healthcare in conjunction with the state and with the federal governments.
The quality of management in many cities is improving, reflecting the recent increase in transparency. Fitch also views attempts by some local administrations to structure deals backed by the renegotiated services tax as positive. However, these deals often do not exhibit robust historical data on effective collections, challenging their technical viability. In our view, most cities still face consistently high levels of floating short-term debt (restos a pagar) and low levels of liquidity.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
2014 Outlook for Brazilian States (Macroeconomic Adversity, Rampant Expenditures and Debt in State's Election Year)