States of Sao Paulo and Minas Gerais affected along with cities of Rio de Janeiro and Belo Horizonte
New York, November 29, 2010 -- Moody's Investors Service has upgraded the rating of four regional
and local governments (RLGs) in Brazil to reflect the improved operating
environment in Brazil and progress these RLGs have made improving their
own credit profiles.
The upgrades bring the ratings close to or just below Brazil's Baa3
sovereign rating with a positive outlook. They include:
--State of Sao Paulo to Baa3 with a stable outlook from
Ba2 with a stable outlook
--State of Minas Gerais to Ba1 with a stable outlook from
a Ba3 with a stable outlook
--City of Rio de Janeiro to Baa3 with a positive outlook
from Ba2 with a stable outlook and the national scale rating to a Aa1.br
--City of Belo Horizonte to Baa3 with a stable outlook from
Ba1 with a stable outlook and its national scale rating to Aa1.br.
"These rating actions reflect the stability and continuity of macroeconomic
policies and trends over many years that helped solidify improvements
in the country's credit profile, leading to the upgrade of
the Brazilian national government to Baa3/positive last year,"
said Moody's Vice President Debra Roane. "Those same
factors have also contributed to the better fiscal and debt performance
of the two states and two municipalities affected by our latest action."
She said the federal government's long-standing policy stance
in favor of meeting fiscal targets and respecting "fiscal responsibility"
has been in place for many years. "These fiscal policies
extend to the continued oversight and control over RLG finances and debt".
"Each of the states and municipalities being upgraded has also shown
significant improvement in their debt and financial metrics as well as
their management practices leading to the rating adjustments."
The rating rational for each of these governments is indicated below:
The State of Sao Paulo's issuer ratings have been upgraded to Baa3
with a stable outlook reflecting a long track record of healthy operating
surpluses and, when capital expenditures are included, small
financing surpluses which are supported by the state's prudent fiscal
management practices and the strong performance of its own source tax
revenues. The favorable financial performance has allowed Sao Paulo
to internally finance an increased level of capital expenditures which
are of key importance to the state's economic progress. The
state's role as the country's industrial engine and the presence
of the national financial centre located in the capital city of Sao Paulo
provides significant support to the state's tax revenues and budget
operations. Ongoing fiscal reforms including measures to reduce
tax evasion have also bolstered budget outcomes.
The rating also incorporates a still high, albeit declining,
debt burden which is a credit weakness. In addition, Sao
Paulo's financial performance will remain challenged by the rigidity
in the state's expenditure base related to inflexible personnel
costs, large social service responsibilities and significant infrastructure
The State of Minas Gerais' issuer ratings have been upgraded to
Ba1 with a stable outlook reflecting an improving trend of financial operations
that is due to significant fiscal reforms and tax evasion reduction measures
implemented over the past seven years. The state was able to minimize
the impact of the economic downturn on its revenues through the exercise
of expenditure controls in 2009 resulting in a still healthy operating
surplus. Some weakening in budget outcomes is anticipated in 2010,
as personnel expenditures are estimated to have risen significantly,
but improvement is anticipated in 2011 with renewed spending constraints
likely to be applied. The state's large and diverse economy
is recovering strongly from the downturn in 2009, which should underpin
further improvements to its financial performance over the medium term.
The rating also incorporates the state's high, although declining
debt burden; debt ratios are expected to stabilize over the medium
term. Demand pressures for social services and critically needed
infrastructure development are expected to continue to challenge financial
The City of Rio de Janeiro's issuer ratings have been upgraded to
a Baa3 with a positive outlook (national scale rating upgraded to Aa1.br
from Aa3.br) reflecting a strong track record of financial performance,
solidified by the city's demonstrated resilience to the economic
downturn in 2009--during which time budget outcomes strengthened.
These trends are underpinned by prudent fiscal management that includes
ongoing improvements to tax administration and expenditure controls.
Predictable and stable transfers from the federal and state government
also underpin positive performance.
The rating also incorporates the steady decline in the city's now
more manageable debt burden and the recent improvement in the debt structure
through a refinancing of debt at better terms. An enhanced liquidity
position and plans to capitalize the pension fund also bolster credit
quality. Risks include rigidities in the city's budget,
pressures to meet demands for social services and significant capital
requirements; the latter includes potential exposure to expenditure
overruns in the transport infrastructure built to service the 2016 Olympics.
However, the city is not responsible for facilities related to the
games themselves which limits exposure to cost overruns.
The City of Belo Horizonte's issuer ratings have been upgraded to
Baa3 with a stable outlook (national scale rating upgraded to Aa1.br
from Aa2.br) reflecting the city's favorable financial performance
supported by a large service based economy, prudent financial management
and predictable and stable state and federal transfers. The city
weathered the economic downturn in 2009 well with operating surpluses
maintained at healthy levels despite the impact of less favorable trends
in the city's taxes and state transfers.
Of key importance to the rating is the city's relatively low debt
burden which reflects historical practices including prudently not engaging
in the issuance of domestic bonds in prior decades, a practice that
spurred rapid debt accumulation in many other Brazilian local and regional
governments. While the debt burden may rise over the medium term,
to finance needed infrastructure, the low starting position creates
room for further indebtedness.
The principal methodologies used in these rating actions were Regional
and Local Governments Outside the US published in May 2008, and
The Application of Joint Default Analysis to Regional and Local Governments
published in December 2008.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".br"
for Brazil. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Implementation Guidance
published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings."
The last rating action on the State of Sao Paulo was taken on 14 November
2006, when Moody's affirmed the Ba2 issuer rating.
The last rating action on the State of Minas Gerais was taken on 4 October
2007, when Moody's upgraded the issuer rating to Ba3 from
The last rating action on the City of Rio de Janeiro was taken on 15 February
2008, when Moody's upgraded the issuer ratings to Ba2 from
Ba3 (Global Scale) and to Aa3.br from A2.br (Brazil National
The last rating action on the City of Belo Horizonte was taken on 18 July
2008, when Moody's assigned issuer ratings of Ba1 (Global
Scale) and Aa2.br (Brazil National Scale).
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Moody's Investors Service
MD - Sub-Sovereigns
Moody's Investors Service Ltd.
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Moody's: Sustained Record of Positive Trends in Brazil's Operating Environment Leads to Rating Upgrades of Regional and Local Governments
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