News Column

Fitch Affirms the Ratings of the State of Maranhao; Outlook Stable

June 5, 2014

SAO PAULO & RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Brazilian State of Maranhao's ratings at 'BB+'. The agency has also affirmed the state's national long-term rating at 'AA-(bra)'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The State of Maranhao's ratings affirmation considers the stagnant fiscal performance of the state through the cycle, as observed in other Brazilian subnationals. The ratings are also based on the state's modest economic base, counterbalanced by a high volume of federal transfers. Despite growing relatively faster than Brazil, Maranhao's GDP corresponds to less than 2% of Brazil's. Federal transfers accounted for a high 51.1% of the state's operating revenues in 2013 (58% in 2012), denoting a below average fiscal autonomy.

After peaking at 18.4% in 2011, Maranhao's operating margin was affected negatively by a lower amount of federal transfers in 2013 and sank to 9.3%. This is moderately higher than other Brazilian subnationals. Fitch believes operating margins should be above 10% in the years following sustainable growth in proprietary tax collections and the state's capability of managing expenditures, even considering the high social demands.

Urbanization and sanitation rates compare very poorly with other states in Brazil, demanding high and continued investments. With marginal improvements since June 2013, education and law enforcement indicators are still below Brazil's, pressuring personal expenditures. Fitch expects some enhancements in the medium term when investment plans are fully executed.

The 'Viva Maranhao' is the state's BRL3.8 billion (USD1.7 billion) infrastructure investment program. Still, project execution is slow as only 6% is under progress to date. The main projects in the program are related to city road integration, healthcare and sewage. Total private investments pipeline should gradually mature to reach BRL101.4 billion (USD42.2 billion) by 2020, and as of May 2014, roughly 27% of this amount has been completed.

Maranhao holds a moderate debt burden; in 2013, financial debt was 4.5 years of the current balance following an external credit operation with a private foreign bank to refinance a major portion of the federal debt. As a result, external debt was 61.1% of total debt and is fully guaranteed by the Federal Government. As a prudent measure, the state has constituted a reserve for principal payments.

Maranhao's pension plans are managed by Fundo Estadual de Pensao e Aposentadoria (FEPA). The consolidated actuarial deficit totaled BRL19.7 billion in 2013, corresponding to 1.8 years of the state's operating revenues. The relatively moderate deficit also is explained by the fact the state contributes 15% of the consolidated payroll, which is higher than other states in Brazil. In 2013, pension-related expenditures were 12% of operating expenditures and should marginally increase in 2014.

Fitch has affirmed the State of Maranhao's ratings as follows:

--Foreign Currency long-term Issuer Default Rating (IDR) at 'BB+'; Outlook Stable

--Foreign Currency short-term IDR at 'B';

--Local Currency long-term IDR at 'BB+'; Outlook Stable

--Local Currency short-term IDR at 'B';

--National long-term rating at 'AA-(bra)'; Outlook Stable

--National short-term rating at 'F1+(bra)'.

RATING SENSITIVITIES

Upgrade Factors: Although not likely in the short term, Fitch would consider a positive rating action should Maranhao increase its importance nationwide and tax autonomy to levels comparable with the south and southern states of Brazil.

Downgrade Factors: A downgrade would be warranted if operating margins consistently fall below 10%.

Maranhao is located in the Northeast region of Brazil. With an estimated Gross Domestic Product of BRL61.5 billion, the state is the 16th largest state in Brazil with a privileged geographic position for exports.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'International Local and Regional Governments Rating Criteria (Outside the United States)' (April 2014).

Applicable Criteria and Related Research:

International Local and Regional Governments Rating Criteria - Outside the United States

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719656

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833157

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Paulo Fugulin

Director

Fitch Sao Paulo

Alameda Santos, 700, 7th floor

Sao Paulo, Brazil

+55-11-4504-2206

Secondary Analyst

Maria Rita Goncalves

Senior Director

+55-21-4503-2621

Committee Chairperson

Humberto Panti

Senior Director

+52-81-8399-9152

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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