Despite the economic challenges faced by Brazilian states, they will gain revenue as the decline in oil prices has allowed them to raise gasoline tax rates, Fitch Ratings says. Santa Catarina (BBB-/AA-(bra)/Stable) estimates that for every 1% increase in taxation over gasoline, overall tax collections increase by 4%. Bahia and Minas Gerais have raised their gas taxes by 3% to 29% and 30%, respectively. Before the decline in oil prices, Rio de Janeiro (BBB-/AA-(bra)/Stable) already had the highest tax rate among states at 31%.
Rio de Janeiro is the most exposed to risk related to the decline in oil prices. In 2014, 10% of the state's total revenues are derived from oil royalties. Rio de Janeiro is forecast to receive BRL9.020 billion (USD3.469 billion) in oil royalties in 2015 assuming Brent prices at USD100/barrel. 60% of that revenue is directed to Rio's pension system and the state is responsible for covering for any shortfall to the pension.
In our view, Rio de Janeiro's capacity to reduce operating expenditures is limited. The state could use non-recurring revenues, such as the sale of assets, to meet its pension payments in 2015 only. The state plans to increase tax collections by 10.5% in 2015 but the likelihood of that rise is uncertain during the economic challenges the country is facing.
We expect limited direct impact on other state tax revenues from the recent allegations involving Petrobras as state tax collections are based on the volume of gasoline and oil related products sold, not the profitability of the corporation. We also expect a relatively small decline in Imposto sobre Operacoes relativas a Circulacao de Mercadorias e Prestacao de Servicos de Transporte Interestadual e Intermunicipal e de Comunicacao (ICMS) as it is calculated on telecommunication, utilities, and oil-related activities. However, Fitch believes that the news involving large construction companies may have a negative impact on aggregate tax collections later in 2015 for most Brazilian states.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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