Rio ‘AAA’: what does Fitch’s credit rating mean for the city?

Agency raises the city of Rio's credit rating to AAA grade, the highest level, and leaves Rio ahead of São Paulo Rio de Janeiro received the maximum grade on the national credit scale from Fitch Ratings, one of the main risk rating agencies in the world. RJ1 listened to experts to understand what benefits, in practice, changing from AA+ to AAA brings to the city. The classification works as a kind of seal on the municipality's ability to honor its debts and other financial commitments. The better the assessment, the lower the perception of risk for those who intend to lend money or invest in projects related to the city. What does it mean to receive AAA? Rating agencies analyze governments and companies to estimate how likely they are to meet their financial obligations. The scores work in a similar way to a scale: the higher they are, the lower the credit risk is considered. On Fitch's national scale, AAA is the highest rating. This does not mean, however, that Rio has received the best possible evaluation in a global comparison. The AAA rating announced by Fitch is national, that is, it compares the municipality's credit risk with that of other Brazilian issuers. Why might this attract investment? A better rating can increase the confidence of banks, funds and other investors in the municipality's ability to pay. According to economist Gilberto Braga, professor at Ibmec, this is especially important for institutional and foreign investors who follow rules on the level of risk in the places where they can invest resources. With a lower perception of risk, the municipality can find more favorable conditions to obtain financing and become more attractive for certain investments. And what changes for Rio? There is no automatic or immediate change. Receiving AAA does not mean that new money will immediately enter the city's cash flow, nor does it guarantee the opening of companies or the creation of jobs. The effect is indirect: a fiscal situation considered more solid can facilitate investments and financing and contribute to a more favorable environment for carrying out new projects. If this turns into new ventures, the result could appear in the creation of jobs and an increase in municipal revenue. More revenue can also expand the city hall's investment capacity — but the way these resources are applied depends on the municipal government's decisions. Why did Fitch improve the rating? In the report, Fitch states that Rio has presented "consistent improvements in fiscal management" in recent years, which have translated into solid operating margins and good liquidity indicators. The agency also foresees a gradual reduction in debt, with payments tending to exceed the taking out of new loans. Agency reservations Fitch, however, pointed out weaknesses. Among them are the dependence on a small number of taxpayers, the little capacity to increase revenue through taxes and the difficulty in cutting expenses in the face of a possible drop in revenue. In other words: AAA is a positive assessment of the municipality's credit risk, but it does not mean that the city's accounts are free from vulnerabilities. More about Fitch's analysis Fitch also reviewed the Individual Credit Profile (PCI) rating, the financial health indicator without considering external support, which advanced from “BB” to “BB+”, which means "medium to low" risk – and indicated a stable outlook for this assessment. Fitch also presented the following reasons for the decision: Risk Profile: ‘Medium to Low’ Financial Profile: Category ‘A’. Revenue Robustness: ‘Average’. Justification: "the municipality has relatively low dependence on transfers from the Union and exposure to volatile revenue sources"; Revenue Adjustability: ‘Weak’. Justification: "dependence on a small number of taxpayers, the limited capacity to adjust taxes and the history of federal intervention in subnational tax policy"; Expense Sustainability: ‘Average’. Justification: "Rio reports moderate control over expense growth, with solid margins and is up to date with its payroll." Expense Adjustability: ‘Weak’. Justification: "low capacity of the municipality to reduce expenses in response to reduced revenues"; Robustness of Liabilities and Liquidity: ‘Average’. Justification: "Rio has regularly paid off its obligations over the years, which results in a very low rate"; Liabilities and Liquidity Flexibility: ‘Average’. Justification: Fitch sets a limit of 100% for the average of the last three years. Rio reported an average liquidity ratio of 67.1%; Peer analysis in Brazil According to Fitch Rating, Rio's closest peer is the State of São Paulo, which has a long-term national rating of AAA and a stable outlook. Both, according to the agency, have a 'Medium to Low' risk profile and an 'A' financial profile. However, adds the agency, Rio's payback index (the period for the return of an initial investment), “which is less pressured and is at the upper level of the 'AA' category, explains why its PCI is one grade above that of São Paulo”. On a global scale, the rating of states and municipalities needs to be anchored in Brazil's sovereign ceiling, which remains at "BB", with a stable outlook. Credit score: what it is, what it is for and what happens when Brazil loses its classification Credit score: what it is and what it is for