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Rating Action:

Moody's Upgrades Minas Gerais' Ratings to Ba3

04 Oct 2007
Moody's Upgrades Minas Gerais' Ratings to Ba3

New York, October 04, 2007 -- Moody's upgrades the global domestic and foreign currency issuer ratings of the State of Minas Gerais (Brazil) to Ba3 from B1. The rating outlook is stable. The upgrade reflects continued improvement in the state's financial performance and expectations that fiscal progress will continue to be made over the medium term. The rating also incorporates the state's sizeable, but declining debt burden. Budgetary challenges facing the state include considerable expenditure rigidity related to personnel and debt service costs.

The implementation of budgetary reforms has been of key importance to the state's improved performance. The modernization of tax collection systems, reduced expenditures through centralized purchasing and improved expenditure controls have all contributed to better fiscal performance over the period of 2003-2006.

Operating surpluses have increased each year since the state achieved a surplus in 2003 and have averaged 7.5% of revenues over this period. When capital expenditures are included, the state has also maintained a financing surplus, albeit narrow (total revenues before borrowing minus total expenditures before debt amortization) since 2003. The state achieved this improvement while also increasing capital expenditures, which is of critical importance to the state's economic growth.

Minas Gerais' debt burden is sizeable but has eased in recent years with growth in state revenues. The stock of debt has continued to grow despite fiscal improvements and minimal new borrowing due to the impact of inflation indexing and capitalization of debt service amounts in excess of limits established by the federal government. In recent years, increases due to debt capitalization have been offset by the beneficial effects on the stock of debt of low inflation and the appreciation of the Brazilian currency.

Over the next three years the state's borrowing will increase with new loans from multi-lateral institutions; the debt burden, however, is expected to maintain a downward trajectory as revenue growth should exceed the pace of growth in debt.

The rating is supported by Minas' relatively large and diverse economic base--the state is the third largest in the country by GDP and the second by population--that amply supports the state's sizeable own-source tax revenues.

Moody's also notes that the ratings reflect a national operating environment that is characterized by low GDP per capita, high economic volatility and a low ranking on the World Bank's Government Effectiveness Index, suggesting a relatively high level of systemic risk as reflected in Brazil's Ba1 rating.

Minas Gerais' ratings and stable outlook also reflect the application of Moody's Joint Default Analysis methodology which incorporates a low likelihood of extraordinary support from the federal government (Ba1, stable) should the state approach a default situation.

New York
Yves Lemay
Managing Director
International Subsovereign Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Debra Roane
VP - Senior Credit Officer
International Subsovereign Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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