Fitch: US Dollar Strength Hurting Some Brazilian States

NEW YORK--(BUSINESS WIRE)-- The decline in the Real (BRL), particularly compared to the U.S. dollar (USD), is a risk for many Brazilian states and could become an additional financial burden, according to Fitch Ratings. States with the highest amounts of foreign debt are most exposed and their ratings could be pressured in the mid-term. However, some states benefit from several important mitigants.

In aggregate, foreign debt makes up 13% of the states' total debt, having risen from around 8.2% in 2012. For some states, the foreign debt is as high as 40%. Sixteen states have foreign debt in excess of 10%, including Rio de Janeiro (BBB-/AA-(bra)/Stable). Some cities plan to issue foreign debt in 2015. "https://www.fitchratings.com/web_content/images/fw/fw-chart-20150318.htm" Click here to view related chart for more details.

We expect the demand for foreign and domestic denominated state credit in 2015 to weaken further. USD strength, the local fiscal restraints (including cost rationing) and the weak forecast for the Brazilian economy will likely push down the already low level of investment. Going forward, the federal fiscal adjustment proposal would preclude states from some types of federal government loans. Despite being fully guaranteed by the federal government, the foreign currency exposure is not counted in hedge mechanisms.

In our view, all the states' credit profiles benefit from the implicit support of Brazil's federal government (BBB/Stable) in terms of debt management. Some benefit from other mitigants to the currency risk. Some have the option to prepay their foreign debt with a credit line granted by Banco do Brasil in BRL. A few states also indirectly link tax revenues to exports and royalties in USD. The current credit lines in USD are still more attractive than the original debts they refinanced, provided that the BRL does not depreciate more.

The states' foreign loans are long term, reducing refinancing risks. Several that refinanced federal debt with foreign private creditors in 2012 and 2013, such as Minas Gerais and Mato Grosso, will see their debt service costs rise because of the changes in currency valuations. Maranhao's (BB+/AA-(bra)/Stable) refinancing is 32% of its outstanding debt. Santa Catarina's (BBB-/AA-(bra)/Stable) is 17.8%. This foreign debt is not material for the largest state of Sao Paulo (BBB/AA+(bra)/Stable) and Parana (BBB-/AA(bra)/Negative).

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
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Source: Fitch Ratings

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