SAO PAULO--()--Fitch Ratings has today assigned the following initial ratings for the State of Santa Catarina (Santa Catarina):
--Foreign currency long-term rating at 'BBB-', Stable Outlook;
--Foreign currency short-term rating at 'F3';
--Local currency long-term rating at 'BBB-', Stable Outlook;
--Local currency short-term rating at 'F3';
--National long-term rating at 'AA(bra)', Stable Outlook;
--National short-term rating at 'F1+(bra)'.
RATING ACTION RATIONALE
The ratings are based on the fact that the economy of Santa Catarina represents 4.8% of Brazilian GDP, reflecting both its status as the eight-largest state in Brazil and its above average operating margins (15.8% in 2011). Fitch believes the state is challenged to defend its modest economic importance, given the faster growth of other states in Brazil. The ratings also factor in the state's relatively higher tax autonomy, the fact that it operates with significant tax incentives granted to corporates, corresponding to roughly one-third of total tax collections and its relatively higher tax payer concentration base.
Santa Catarina has revised its revenue growth for 2013 in light of the national economic slowdown and the passing of adverse tax laws such as the national unification of ICMS tax over imported goods at 4%, factors which also affect some other subnationals. In Fitch's opinion, any adjustments will likely occur on the side of expenditures but with limited room for reduction. The state faces additional pressure on personal expenditures, which are very close to the regulatory limits imposed by the Fiscal Responsibility Law (FRL).
In 2012, the state obtained permission to refinance BRL1.4 billion with foreign currency denominated loan, payable in 10 years with one year grace period. This refinance loan is related to a federal debt portion. As a result, total foreign currency debts increased its share and should represent 16.5% of consolidated debt (3.1% in June 2012), fully guaranteed by the Federal Government. The state expects this deal to generate interest payment release to be mainly channelled for investments. As verified with other states in Brazil, investment level has been historically low (7.2% in the last five years), and should grow in relevance.
Santa Catarina presents midrange indebtedness ratios in which financial debt represented 1.1 year of operating balance in 2011 and should mildly increase in 2013. Moreover, the state's short-term liabilities amounted to 27.8% of total, implying higher than average refinancing risk when compared to other states in Brazil. Fitch expects this ratio to diminish as a result of the refinancing loan.
As a sponsor to its proprietary pension system (IPREV), Santa Catarina made monthly payments of BRL135 million (22.8% of personal expenditures) in 2011. IPREV presents one of the highest actuarial deficits among Brazilian subnationals (BRL133.5 billion) that must be funded by the state within 70 years. Current nominal benefits correspond to 104.9% of current wages, which translates into increasing financial imbalances until 2025.
Santa Catarina's population of around 6.3 million in 2010 represents circa 3.2% of the Brazilian population. Its industrial sector is considered well developed, with a 34.4% stake of GDP, higher when compared to the Brazilian average of 23.4% in 2011.
RATING DRIVERS AND SENSITIVITIES - INTERNATIONAL AND NATIONAL RATINGS
Further increases in expenditures or inability to control personal expenses could deteriorate Santa Catarina's operating performance, thus contributing to a negative rating action. Operating margins below 5% and short-term liabilities higher than 30% of total liabilities could also lead to a negative review of the ratings.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (August 2012);
--'Local and Regional Governments Rating Criteria' (April 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
International Local and Regional Governments Rating Criteria - Outside the United States