Credit rating agency Fitch Ratings announced on Tuesday its decision to downgrade several state and city governments in Brazil to junk status. The decision follows the downgrade of federal government bonds and several important Brazilian companies.
According to Fitch, no subnational entity should be rated higher than the sovereign bonds. The agency believes the states and cities would be affected by changes in the sovereign ratings and outlook, as well as changes in the government' s willingness to provide support if necessary -- even though Fitch does not believe there will be changes in its willingness to help.
"Considering the features of the Brazilian institutional framework, Fitch does not believe any subnational entity to be rated higher than the sovereign," the agency said. The states of Sao Paulo, Santa Catarina and Parana, as well as the cities of Sao Paulo and Rio de Janeiro, were downgraded from BBB- to BB+, thus losing their investment grade, as it happened to the federal government.
The states of Maranhao and Rio de Janeiro, already at junk status at BB, were downgraded to BB-. The outlook for all the ratings remains negative. The motives behind Fitch's downgrading of Brazil's sovereign bonds were the prolonged recession, political instability and bleak perspectives for the future.
In some states' cases, there are particular reasons. "For Maranhao, there is above average reliance on federal transfers, corresponding to more than 50 percent of the state's operating revenues in 2014. The State of Rio's ratings downgrade reflects its relatively higher reliance on oil related activities," Fitch explained.
"Since State of Rio is short on oil royalties given the historic low oil prices, Fitch believes the state will further leverage on the implicit support from the Brazilian federal government when it comes to the federal debt portion payment," the rating agency added.
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