S&P downgrades Rio de Janeiro state's rating by three notches.

Rio 247 - The Standard & Poor's (S&P) rating agency downgraded the long-term credit rating of the State of Rio by three notches on Monday (30), from “BB-” to “B-”. According to S&P, the downgrade is a consequence of the continued worsening of its financial situation, making it difficult to meet commitments to creditors. The agency reported that “Rio has not implemented measures to stem its deep financial crisis, which has generated uncertainty regarding the State's willingness to prioritize the timely payment of debt service.”

“The downgrade (...) reflects our view of the state’s rapid and ongoing fiscal deterioration in the first months of 2016, its weak cash position and, contrary to what we have observed in recent months, uncertainty regarding its willingness to prioritize the timely payment of debt service,” S&P said in a statement.

As the agency cited, one of the triggers for the downgrade was Rio's failure to pay, on May 23, the $8 million debt service on a loan from the French Development Agency (AFD). According to S&P, the money ended up being used to pay civil servants' salaries. 

This was the fourth consecutive downgrade by the agency, in a sequence of "downgrades" that began in April 2015 as the state's financial crisis deepened. During this period, Rio lost its investment grade rating (a kind of seal of good creditworthiness) and fell six notches on the S&P scale.

The state is just one notch away from a C rating, which indicates that, in the event of adverse economic conditions, it “will likely be unable to honor its financial commitments.” The agency also placed the state on “CreditWatch,” indicating the possibility of further downgrades in the next 90 days, when “we will assess under what circumstances the federal government will continue to provide support to Rio, as well as the state’s overall fiscal measures in view of its weak cash position.”

 

 

 

 

 

S&P considers the State's willingness to prioritize the timely payment of its debt obligations "uncertain." Instead, it believes the State will continue to "prioritize the payment of public servants' salaries over its debt obligations."

The agency predicts that Rio will continue to register a fiscal deficit over the next 12-18 months, "maintaining a very weak budgetary performance." For 2016, the forecast is that the state's operating deficit will total at least R$ 8 billion, or 15% of operating revenues. Deficits after capital investments are expected to be around 20% of operating revenues.

"Thus, the state will continue to delay payments to suppliers," the agency predicts.

GOVERNMENT INTENDS TO GRANT STATES A 6-MONTH MORATORIUM

Just like O GLOBO reported this TuesdayThe economic team is willing to grant a six-month moratorium to the states. According to government officials, this period would be used to provide temporary relief to governors while a redesign of the proposal to extend state debts with the federal government is underway. Technicians say the idea is to make changes to the project submitted by former Finance Minister Nelson Barbosa to Congress, which provided for a 20-year extension of state debts to the federal government in exchange for fiscal concessions.

"A six-month timeframe allows time to arrive at a new proposal. Any payments not made within those six months will be carried over, and there will be fiscal pressure, especially regarding how states handle personnel and social security expenses," the expert stated.

Members of the economic team acknowledge, however, that the six-month grace period will not solve the problems of all states, as some have completely unstructured finances, and it will be necessary to find differentiated solutions. They state that, in the case of the State of Rio, not even a 12-month moratorium, as proposed by the acting governor, Francisco Dornelles, will be sufficient.