Brazil's Rebellious States About to Face Harsh Budget Realities Over Debt
Brazil's Rebellious States About to Face Harsh Budget Realities
Rio de Janeiro, Jan. 13 (Bloomberg) -- Weekend flooding left
about 1.8 million people without water over the weekend in Rio de
Janeiro because the state's water company didn't have enough
supplies to treat water following a flood.
Yet Monday morning, the incoming president of Cia Estadual
de Aguas e Esgotos do Rio Janeiro vowed never to sell Brazil's
second largest water company, even though private investors have
been willing to spend up to $1.7 billion to take over the company
and improve services.
Cases such as these have investors pulling their hair out in
Brazil, and help explain why the finances for many of Brazil's 26
states -- and by extension the federal government -- are in such
a mess.
''I don't think it's sunk in just how broke many of Brazil's
state governments really are,'' said Walter Stoeppelwerth.
''These promises to not privatize companies or lay off workers
make no sense when you do the math.''
Brazilian stocks and bonds have plunged last five days after
Minas Gerais, the second most populous state, said it had no
money to make the 78 million reais ($60 million) in monthly
payments it owes the federal government on 18.5 billion reais of
debt.
The debt impasse underscores Brazil's weak public finances,
and undermines Brazil's ability to slash its budget deficit, a
key condition to further aid from the International Monetary
Fund.
The crisis has also heightened concern that Brazil may have
to weaken its currency to bring down interest rates and stem
capital flight.
Won't Give In
President Fernando Henrique Cardoso has vowed not to give in
to the states, but negotiation may be the only solution to the
impasse.
''We've done everything we can to help the states pay their
debts,'' Cardoso said. ''Now they have to administer the money
they have left better.''
The sale of Cedae, as the water company is called, won't
solve Rio's budget problems overnight of course. But the state's
unwillingness to sell the company highlights the financial
miscues at the state level.
Rio de Janeiro's most pressing problem is staffing: it has
too many people on the payrolls. Rio spends more than 80 percent
of its $5.15 billion in annual tax revenue on salaries and
pensions, and another 10 percent on debt payments.
''There is nothing complex about the situation ... they have
to pay their debts,'' Cardoso said. ''What they do with the rest
of the money has to be well administered.''
Spending on is staff has been bloated by generous
governments, laws that make it nearly impossible to lay people
off and hefty pension benefits that allowed many government
workers to retire in their early 50s on full salary.
About a quarter of the 400,000 on Rio de Janeiro's public
payroll are pensions, said Stoeppelwerth.
After payroll, Rio is left with about $500 million for all
other government activities, a third of what the previous
government had hoped to raise from Cedae's sale.
Many of Brazil's 26 states, responsible for about a third of
Brazil's $321 billion public debt, face virtual paralysis if they
can't control spending on pensions and payroll. Most of Brazil's
budget deficit before interest payments on debt, is generated at
the state level, Stoeppelwerth added.
No to ''Neo-Liberals''
Investor concern that some states might follow the example
of Minas Gerais governor Itamar Franco and default on debts
rather than cut spending, has seen Brazilian securities plummet
in recent days.
Brazil's benchmark Bovespa index has fallen 18 percent since
Franco called for a 90-day moratorium on his state's debts to the
federal government and suppliers. Brazil's capitalization Brady
bonds, one of the most traded emerging market debt securities
fell more than 10 percent in the same period.
The market turmoil doesn't faze Cedae. The mood was
triumphant Monday when Marco Montenegro was sworn in as Cedae's
new president. Trade union activists who crowded into the
ceremony in a threadbare downtown Rio de Janeiro auditorium
cheered his attacks on state asset sales and the government.
Recent state asset sales have seen thousands of former
government workers laid off as new private sector managers slash
spending.
''We are certain that here in Rio the decisive battle to
shape Brazil is being fought,'' he said. ''Neo-liberal solutions
don't bring improvements to Brazilian citizens.''
He added that Cedae workers were showing solidarity and
working around the clock to fix the problems that lead to the
weekend water shortages, brought on by floods that contaminated
reservoirs with silt.
Investments
He was not immediately sure, though, where money for
improving Cedae services would come from.
''I haven't fully reviewed the books,'' he told journalists
at an impromptu press conference. ''I do think there are some
loans in the works though.''
The previous government's sale plan would have required the
winner to invest at least $2.9 billion in new water mains, sewage
treatment plants and water filtration stations over 25 years, an
average of $115 million a year. The state would receive about the
same amount annually in license payments. Additionally the new
owners would have assumed about $1 billion in Cedae debts.
The cost of Rio-state's failure to invest in Cedae has been
borne primarily by the state's poorest people. At present only
about half of Rio de Janeiro's 13 million people have sewage
connections. Large parts of the state, including many urban
shantytown districts, still have no running water.
Rio's tourism industry has also suffered as a result of
pollution of some of the city's best beaches.
''More and more of the state budgets have been going to pay
salaries and pensions and less and less to the rest of the
budget,'' said Raul Velloso, an independent public finance
consultant in Brasilia.
Police Strikes
The state governors, many of whom took office for the first
time Jan. 1 appear loathe to slash payrolls for fear of more
social unrest. Violence has already erupted in some states, as
unemployment mounts as the economy slips into recession.
Minas Gerais, Espirito Santo, Ceara and Alagoas all suffered
police strikes by officers protesting delayed or low salaries, a
lack of equipment and hazardous working conditions.
Several striking officers were killed in confrontations with
other law enforcement officials and federal troops.
Throughout the country, over-crowded prisons regularly
abrupt in riots. One police precinct in Rio has 352 people jammed
into cells made for 120. Many are condemned criminals serving
time in as holding cell for lack of penitentiary space. A recent
review at one precinct found 13 people serving time who should
have been released.
In Rio it was recently estimated that prosecutors managed to
investigate less than 10 percent of murders and solved almost
none. Police, who face heavily armed drug gangs in Rio and Sao
Paulo, are sometimes forced to buy their own ammunition. A survey
of police precincts in Sao Paulo for 1997 found that some hadn't
solved a single crime all year.
Despite the lack of money new Gov. Anthony Garotinho has
promised to hire thousands of police officers, raise teacher
salaries and set up a new lending bank for small business.
''Real Crunch'' Coming
''There's no way Garotinho is going to be able to meet even
a tiny amount of his promises under the current circumstance,''
Stoeppelwerth said.
In exchange for subsidized interest rates, the states have
agreed to pay a fixed amount in debt payments each month, under
agreements signed last year. The rates amount to up to 15 percent
of total revenue for the states.
In exchange, the states are expected to limit payroll
spending to 60 percent of spending, a cut off many states have
missed.
In all, the states owe 100 billion reais, with annual
payments equal to about 5 billion reais in 1999.
''We haven't seen the real budget crunch yet,'' he said.
''When we do I can almost assure you that even left-win
governments will start privatizing.''
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