Fitch: Brazil's Court Decision Is Short-Term Risk for States

NEW YORK--(BUSINESS WIRE)-- Shortening the timeframe that Brazilian states and municipalities have to pay legal claims to individuals and companies will create short-term fiscal pressures, Fitch Ratings says. However, we believe the mid-term impact could improve their fiscal health.

The Brazilian Supreme Court ruled that the pending legal claims ("precatorios") must be paid off by 2020. BRL38.9 billion in precatorios are outstanding. That represents 7.5% of the states' collective 2014 net revenues.

Click here for a chart showing all states. Some states have been spending 2% of their net revenues to service the previous 10-year amortization plan.

We expect the federal government and states to continue to negotiate funding techniques that will promote the states' fiscal stabilities during the shortened precatorio term. The federal government has already agreed to modify the terms of the debt some states owe to release some pressure. We also expect previously delayed federal government transfers to resume. And the possibility of raising teachers' salaries, which consume roughly 25% of states' net revenues, in line with state revenue will likely be under discussion.

States may also be able to redirect some of the assets earmarked to pay precatorios. For example, in June 2013, Rio de Janeiro (BBB-/AA-(bra)/Negative) paid down BRL3 billion in precatorios with some of the legal settlement escrow funds (depositos judicias) held at a large federal bank. Since the bulk of those funds are handled by other bodies of the state, their precise amount is still unknown.

Fitch considers precatorios as contingent liabilities, not debt; they are subordinate to debt. Many of the states renegotiated their debt with the federal government in late 1990s. This portion is considered a quasi-debt and accumulates as a direct risk per Fitch's approach.

Over the midterm, we believe the servicing of precatorios could augment the steps that many states have used recently to manage their costs. Some have created online spending monitoring tools, merged departments, lowered headcount and frozen salary increases. However, the cost adjustment process is facing widespread social challenges.

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.

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Fitch Ratings
Paulo Fugulin
Director
International Public Finance
+55 11 4504-2206
Alameda Santos, n 700 - 7 andar
Edificio Trianon Corporate - Cerqueira Cesar
Sao Paolo, Brazil
or
Humberto Panti Garza
Senior Director
International Public Finance
+52 81 8399 9100
Edificio Connexity, Prol. Alfonso Reyes No. 2612, Piso 8
Col. Del Paseo Residencial
Monterrey, Mexico
or
Rob Rowan
Senior Director
Fitch Wire
+1 212-908-9159
33 Whitehall Street
New York, NY
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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