NEW YORK--(BUSINESS WIRE)--Fitch expects the next Brazilian state governments to control public employee costs as they will continue to face weak economic conditions and low job creation that will likely crimp tax collection growth. On Oct. 5, Brazil held its general elections to choose the president, national congress, state governors and state legislatures. The new officials will take their seats on Jan. 1, 2015.
Despite the adoption of various strategies that materially increased tax revenues in recent years, particularly the value-added tax (ICMS), states are suffering from growing public employee costs, including pension payments. This has led to historically low operating margins. In 2015, operational margins for the five Fitch-rated states are expected to rise to 5.4% from the 4.7% anticipated for 2014. However, there is some room for downward revisions.
States have adopted tax collection enhancements such as refinance agreements for delinquent tax payers, modernization and integration of systems that allow for multiple checks and the application of single ICMS taxation over the entire supply chain. However, these techniques require economic growth to have a powerful impact on tax revenues. And their adoption may not cover growth in public employee costs.
We believe that states with more fiscal autonomy (with tax revenues to operating revenues above 70%), such as Parana (BBB-/AA(bra)/Stable), Santa Catarina (BBB-/AA-(bra)/Stable) and Sao Paulo (BBB/AA+(bra)/Stable), will perform slightly better in 2015 than those that rely on national transfers to meet their current expenditures. Maranhao (BB+/AA-(bra)/Stable) and Rio de Janeiro (BBB-/AA(bra)/Stable) will likely see their fiscal performance more linked to factors outside their states given their relatively higher reliance on federal transfers.
This financial pressure could have a negative impact on infrastructure investments. Most state infrastructure projects have been financed by credit. The number of public-private partnerships has not risen as hoped. Of the 35 projects expected by the five states rated by Fitch, only three have been launched. This can be mainly explained by the projects' lack of viability, elevated guarantees granted by the states and the poor interaction among the various public entities.
A graph showing the annual operating margins and average ICMS tax collection growth is available through the following link:
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