TEXT - Fitch says Brazilian borrower change highlights regulatory need
Feb 26 - Fitch believes Brazilian states will begin to borrow from more domestic private banks and international investors in the near term and those lenders should be aware of important regulatory conditions and pension obligations. In our view, state financing will increasingly be provided by those investors because the traditional domestic creditors such as Banco Nacional do Desenvolvimento Economico (BNDES), Caixa Economica Federal (CEF), and Banco do Brasil (BdB), are reaching their statutory lending limits with negative implications for the gross federal debt. In addition, most multilateral and supranational agencies are also approaching their Brazilian lending limits. We believe one particular regulatory condition is important to understand. The Brazilian federal government guarantees all external debt and the country's treasury constantly monitors states' creditworthiness. Theoretically, states that are rated too low on this scale can neither receive guarantees nor enter into new credit agreements. However, we believe that in practice states from all rating classes are eligible to receive guarantees and may raise new funding. In our view, the lending environment would be improved if this process was more transparent. We also believe lenders should be aware of the deficit that each state's proprietary pension system (RPPS) is running. Many states must cover them in the short term, embedding refinancing risks. We expect deficits to arise more often in the future as decreases in the proportion of active over inactive employees and pensioners. This is mitigated by the adoption of defined contribution plans and migration of beneficiaries to balanced funds. These enhancements are still pending for most plans, since the implementation costs are high and some states may not be able to afford them.
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