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Announcement:

Moody's: Pension liabilities are a growing fiscal challenge for Brazilian states

 The document has been translated in other languages

26 Nov 2014

Mexico, November 26, 2014 -- The state governments of Brazil face a growing financial burden from employee pensions, says Moody's Investors Service. Although pension costs are unlikely to weigh on the credit quality of any of the states in the short term, they could become a negative credit factor for those states with the highest burden within the next decade.

"State pension costs are increasing faster than revenues because of the aging workforce in Brazil, with Brazil's economic slowdown adding further momentum," says Moody's Assistant Vice President -- Analyst Francisco Vazquez-Ahued in the report "Brazilian States: Growing Pension Liabilities Are a Fiscal Challenge."

On average, pension payments absorbed 14% of state revenues in 2013, up from 12% in 2009, according to the rating agency.

The state with the biggest increase in the share of revenue being absorbed by pension payments between 2009 and 2013 in relative terms was Sergipe (not rated). The state with the largest reduction was Amazonas (not rated).

At the heart of the problem is the decline in the number of active workers relative to pensioners in Brazil. Specifically, the ratio of active workers to pension beneficiaries for the median Brazilian state fell to 1.58 in 2012 from 2.19 in 2006.

As pension costs increase, the states will get closer to the limits on employee spending imposed by Brazil's Fiscal Responsibility Law, which curtails regional government's' debt and personnel expenditure, while imposing minimum spending thresholds for health and education.

As the fiscal pressure from rising pension costs increase on the states, the federal government is likely to become actively involved in the problem. In Brazil, the federal government maintains very close oversight of the states, imposing a tight fiscal regulatory environment.

Most of the states in Brazil have enacted partial reforms of their pension systems, starting in 2008. But these changes, such as the creation of defined contribution plans and pre-funded defined benefit regimes, will only ease budgetary pressures in the medium- to long- term, says Moody's, as they apply only workers joining the states' government after a cutoff date.

Moody's also notes that some new prefunded defined benefit plans may prove less well funded than their current actuarial positions state, as the discount rates states use to estimate funding may be optimistically high. Budgetary risks, therefore, could be understated.

For more information, Moody's research subscribers can access this report at

http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1000934.

***

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Francisco Vazquez-Ahued
Asst Vice President - Analyst
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Alejandro Olivo
Associate Managing Director
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JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Releasing Office:
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Moody's: Pension liabilities are a growing fiscal challenge for Brazilian states
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