In the run up to the Olympics this June, the governor of Rio de Janeiro declared a state of financial emergency and pleaded for help from the federal government to avoid a “total collapse in public security, health, education, transport and environmental management”.
The state is a victim of what has been one of the deepest recessions in Brazil’s history. The collapse in commodity prices, low demand from China and a high-level corruption scandal have seen the economy shrink for five consecutive quarters.
Rio de Janeiro boasts one of the biggest fiscal imbalances of all of Brazil’s states. In July it predicted a deficit of 19bn reais (almost $6bn) and had to be bailed out by the federal government.
Now officials are saying the state owes the federal government $53m in overdue debt and that state accounts will be blocked from making payments until the dues have been repaid, according to the BBC. This is reportedly only expected to take a few days.
In a statement, Brazil’s ministry of finance told PFI that the outstanding payments amount to $12.1m, while $9.5m has already been paid.
It stressed that this is “not a lock” on the state’s accounts, but a measure provided for in the loan contracts signed between the federal government and Rio de Janeiro.
Under the procedure, funds in the state’s account will be transferred to the federal government until the debts have been repaid and according to the availability of funds, it explained. The ministry was unable to give a time frame as there is no set time for this to start or end.
According to ratings agency Fitch, which recently downgraded Rio’s debt to C (one above default), the state failed to meet $160m worth of financial obligations to both federal and international creditors between May and September this year.
The state of emergency declared in July enabled the state to borrow more without the approval of the federal government.
Health, police and education budgets had already been slashed in Rio de Janeiro, and on Friday state governor Luiz Fernando Pezao announced a raft of further, harsh austerity measures.
These included wiping 30% off the pensions of low- and middle-income retirees to shore up a pension fund for public workers.
Falling oil prices and Brazil’s corruption scandal centred around state oil company Petrobas was particularly damaging for Rio de Janeiro. As host to the firm’s headquarters, the state’s accounts became heavily dependent on oil receipts.
When the oil wealth was flowing, Rio de Janeiro was able to substantially expand its payroll. Today, in very different times, the state can no longer pay for the bloat in its workforce.
Hosting the Olympics, and building the necessary infrastructure, only added to the burden.
The crisis in Rio de Janeiro could be a sign of things to come for other Brazilian states and the national government.
Recession has blighted the public finances at all levels, and concerns have been raised about the country’s national debt, which stood at 67.5% of GDP in June. Brazil also posted a deficit of 10% of GDP ($150bn) last year, and is targeting a decrease of $52bn for 2016.
The federal government is considering implementing a 20-year spending cap, limiting expenditure growth to the inflation rate of the year prior.
The International Monetary Fund recently suggested a similar rule be adopted at the subnational level to contain state spending, and warned difficult fiscal reforms will be required for the country to return to even modest growth next year.
