NEW YORK & SAO PAULO--(BUSINESS WIRE)--Brazil's newly elected mayors will face a more difficult set of fiscal challenges than their predecessors, Fitch Ratings says. Many Brazilian local governments were put under fiscal stress when state and federal cash transfers to cities began to decline during the previous term (2012-2016). The new mayors will additionally face funding a greater share of hospitals and police forces.
Most Brazilian cities are exposed to the risk of revenue declines through their dependence on cash transfers from the state and federal government. Transfers to the three large cities (Sao Paulo, Rio de Janeiro and Belo Horizonte) were, on average, 37.2% of their operating revenues in fiscal 2015. This will remain a key risk into the new mayors' terms.
The mayors are also facing other shrinking revenues. Local governments collect taxes on services (ISS). The five biggest municipalities saw ISS rise by 5.0% in June of 2016, year over year. But that value was depressed by a 9.3% inflation rate. Revenues may also take an additional hit as the untaxed, informal economy is growing.
New pressures have also resulted in expenses being shifted to the local governments. Brazilian cities may have to provide a higher share of law enforcement and hospital funding in 2016 and 2017 as a growing number of states have severe cash constraints. For example, the City of Rio de Janeiro took on the fiscal liability for two of the state of Rio de Janeiro's hospitals in early 2016 (Albert Schweitzer and Rocha Faria), which raised the city's annual operating expenditures by 2%.
Resolution of these imbalances is unlikely in the near term as structural reforms related to taxation and pensions require federal approval.
The Lava Jato, a federal money-laundering investigation, loomed large in the elections yesterday. The Worker's Party lost many races, while the Social Democrats made gains. And while Joao Agripino da Costa Doria Jr. (Social Democrats) was elected mayor of Sao Paulo, Rio's mayoral contest was close, which triggered a runoff.
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.
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