Fitch Affirms State of Maranhao at 'BB-'; Outlook Negative

SAO PAOLO & BOGOTA, Colombia--()--Fitch Ratings has affirmed the Brazilian state of Maranhao's national long-term rating at 'A+(bra)' with a Stable Outlook. Fitch has also affirmed the Long-Term Issuer Default Rating (IDR) at 'BB-' with a Negative Outlook. The Outlook reflects the Negative Outlook assigned to Brazil on May 9, 2016.

KEY RATING DRIVERS

The affirmation of the state of Maranhao's ratings reflects its adequate fiscal performance as expressed by operating margins higher than 10% over the last five years. In 2015, it reached 7.9% slightly lower than Fitch's expectations as a result of the challenging economic environment. The ratings are also based on Maranhao's modest economic base and low economic diversification.

The state remains very much dependent on federal transfers, which accounted for 54.5% of Maranhao's operating revenues in 2015, despite the state's efforts to increase tax revenues. In Fitch's opinion, this will limit the gains derived from the local economic activities. Moreover, any general downward trend in the national economy translates into a decline in revenue.

Urbanization and sanitation rates remain very poor, especially in comparison to other states in Brazil, demanding high and continued investments. The state has launched a program, Mais IDH, with total investments of BRL500 million in 2015 and 2016 mostly in education and law enforcement. Maranhao's GDP corresponds to less than 2% of Brazil's GDP, despite faster growth than Brazil also propelled by increased activities associated with the Itaqui Port and investments in energy and mining.

Maranhao holds a moderate debt burden. Direct debt was 5.5 years of the current balance in 2015. The recent USD appreciation negatively affected debt service requirements of the state. USD-denominated debt was 48% of total debt and fully guaranteed by the federal government. The state has decided not to prepay foreign debt, despite the weakening of the Brazilian real.

Pension payments have been compromising some 15% of the state's personnel expenditures, with some increase projected for 2017 and 2018. The estimated actuarial deficit of BRL22 billion in 2015 corresponded to 1.6x of the state's operating revenues, which is better than 'BB' rated entities. The state contributes with 15% of the consolidated payroll, which is higher than other states in Brazil.

Maranhao has not yet fully adopted the international accounting standards but constituted provisions for the unrecoverable tax in arrears in late 2015. Moreover, the state has not implemented tools to measure fiscal risks nor economic benefits derived from the application of tax incentives. Maranhao has not significantly suffered from liquidity squeezes in 2015, with no reported delays in commercial and personnel payments.

RATING SENSITIVITIES

Any rating action affecting the Federative Republic of Brazil may exert a direct effect over Maranhao. Moreover, a downgrade will be warranted if operating margins consistently fall below 5%. Fitch no longer expects Maranhao to being structurally able to generate operating margins higher than 10%.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to these assumptions:

--Fitch assumes a moderate level of sovereign support for Maranhao given that the state's most relevant creditor is the Federal Government.

--Fitch assumes that any political transition to a new government during the impeachment process will be smooth and peaceful but with some delays in progress on the government's legislative agenda specially the ones affecting subnationals such as pension reform.

Located in the northeast region of Brazil, Maranhao posted an estimated Gross Domestic Product of BRL61.5 billion, ranking as the 16th largest state in Brazil with a privileged geographic position for exports.

Fitch has affirmed the following ratings:

State of Maranhao:

--Foreign Currency Long-Term IDR at 'BB-'; Negative Outlook;

--Foreign Currency Short-Term IDR at 'B';

--Local Currency Long-Term IDR at 'BB-'; Negative Outlook;

--Local Currency Short-Term IDR at 'B';

--National Long-Term at 'A+(bra)'; Stable Outlook;

--National Short-Term rating at 'F1(bra)'.

Additional information is available on www.fitchratings.com

Applicable Criteria

International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878660

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006071

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006071

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Paulo Fugulin
Director
+55 11 4504-2206
Fitch Rating Brasil Ltda.
Alameda Santos 700
Sao Paulo, Brazil
or
Carlos Ramirez
Senior Director
571 307-5180 ext.1240
or
Committee Chairperson
Christophe Parisot
Managing Director
+33 1 44 29 91 34
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Paulo Fugulin
Director
+55 11 4504-2206
Fitch Rating Brasil Ltda.
Alameda Santos 700
Sao Paulo, Brazil
or
Carlos Ramirez
Senior Director
571 307-5180 ext.1240
or
Committee Chairperson
Christophe Parisot
Managing Director
+33 1 44 29 91 34
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com