NEW YORK--(BUSINESS WIRE)--A reduction in the interest rate Brazilian states and municipalities pay on federal loans will benefit the most heavily indebted states, Fitch Ratings says. Sao Paulo (BBB/AA+(bra)/Stable) and Rio de Janeiro (BBB-/AA-(bra)/Stable) will benefit over the mid-term, as the reduction in the rate could reduce their total outstanding federal debt costs by 50%.
President Dilma Rousseff approved Project Law 99/2013 last week amid some political resistance. The law (Lei Complementar 148/2014) sets the rate on the federal debt that states and municipalities carry at the broad consumer price index (IPCA) plus an annual spread of 4%. The rate will be capped at the Brazilian Central Bank's rate (Meta do Selic). The new rates will be effective back to the inception of the renegotiation agreement contracts signed in the late 1990s.
Previously, rates had been set at a range of spreads over the wholesale index (IGP-DI). Therefore, states and municipals paying the highest of the old rates will gain the most from the recalculation. For comparison, from January 1998 to October of this year, Selic rose by 262.4%. Over the same period, IGP-DI plus 9% increased 293.8% and plus 6%, 242.8%.
For example, Sao Paulo's federal debt is set at IGP-DI plus 6%. We expect that state will have savings of BRL53billion (USD20,595,322,470) by the end of the loan term in 2036. That would be a roughly 27% reduction in the outstanding amount. Rio de Janeiro plans to use the reductions to pay its federal debt by 2029, almost 10 years before the original due date. The ratings Fitch has assigned to Brazilian states and local governments already capture this financial support, and we do not expect any rating actions solely from this law.
A graph comparing index interest rates to Selic rates can be found below:
Additional information is available on www.fitchratings.com.
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