The Republic of Brazil in Crisis: how the bankers will defeat the state of Rio de Janeiro


The financial crisis currently faced by Brazilian state governments has its roots in the political instability created by the impeachment of president Dilma since the end of 2014. Therefore, the federal government should be responsible for the high unemployment and poor income of all.

In the case of states that have combined revenues from regular income taxes with royalties received from oil&gas exploration the situation has worsened (Table 1).

Table 1 – Main revenues of the state of Rio de Janeiro since 2013

R$ Bi 2013 2015 3Q2016
RJ regular income revenue (FPE) 5,0 3,2 1,4
Royalties 3,0 2,3 1,3

Source: SRF

The first set of liberal reforms announced after the “coup of the corrupted” currently mature in the parliament – the strategy has been to approve each item separately, beginning with fiscal contraction impositions for state governors. Meanwhile, new retirement/pension rules are currently in the oven and will be ready to be presented to the national congress after the sunrise of the next year.

In other words, the financial interests that support the Brazilian coup should be satisfied with the immense amount of money of the federal budget that will be soon ready to be converted to debt services (higher interest rates and more debt). Please notice that the inflation in Brazil has been significantly reduced and the time price of Reais is yet among the highest in the world.

At the same time, the privatization/concession program, presented as the solution for unemployment, actually is in its course to attract foreign investments. The neoliberals think they will do that by mixing opportunities raised by the federal government (logistics and energy) with others led, directly or not, by the state governors (sewage, public lighting, solid waste).

One could think its ok for a two years non-democratic government agenda. But it is not. The financial interests look at something equally valuable. The major banks and its political operators are looking at the royalties that the pre-salt oil reserves will provide in the next 10 years.

As we will argument in the present paper, the conflicts of interest between state government and those of the installed political group are obvious and material. We will argument that this conflict of interests pushes the Brazilian coup to another phase, which includes the political submission of non-allied state governments by the same means adopted to produce the impeachment of Dilma (an alliance between mass media Cos, banks and the federal police [Pinto (2015)]).

  1. Royalties from pre-salt oil reserves: the Rio de Janeiro state share

Oil companies pay royalties to governments to compensate negative externalities that the industry brings to the territories and their people. These royalties, in the Brazilian case, are distributed among the federal, state and local levels, according to Table 2.

Table 2 – Royalties rates on oil production after financial adjustments

Confronting states
Municipalities with P&G facilities
Confronting municipalities
Special fund
Min. Science  Technology
Until 5%
After 5%
Note: The royalties distribution rules classifies the municipalities by zones of impact: principal, secondary and boundaries. The main zone is a set of municipalities with oil production or facilities in its territory. The secondary zone encompasses the territories traversed by gas or oil pipelines.

Source: Cipeg (2016)

Under the current rules the amount of royalties is calculated based on three variables: exchange rates to US dollar, oil international prices and the oil gas production. When production and prices rise, there is an increase the amount of royalties. But when Reais devaluate, decrease the sum of money.

The Brazilian production can be examined in Figure 1. The state of Rio de Janeiro contributes with crescent rates due to the ramp-up in the exploitation of the pre-salt reserves in its territorial domain. In December 2015 the Rio de Janeiro state accounted for more than 60% of the total oil production in the country.


Source: Cipeg (2016)

Nevertheless the recent increment in the oil&gas production, the international prices have been depressed due to the persistent low growth world scenario since the ignition of the international financial crisis in 2008 (Figure 2).


Source: Cipeg (2016)

Because of the international oil prices drop, the Brazilian states and municipalities lost one third of its royalties revenues (R$ 20,9 Bi to R$ 14,1 Bi) in 2015. Notice that the São Paulo and Bahia states benefited while others have not (Table 3). The Rio de Janeiro state corresponds to 35% of total which explains why it is among those which suffered the most.

 Table 3 – Situation of Brazilian royalties 2015.

Share 2015 Losses 2015/14
States and Municipalities 58% -33%
Rio de Janeiro 35% -37%
Espirito Santo 9% -24%
São Paulo 7% 26%
Rio Grande do Norte 2% -32%
Bahia 2% -32%
Federal level 38% -32%
Army 6% -35%
Social Fund 15% 28%
Min. Mining and Energy 10% -57%
Min. Science & Tech 4% -36%

Source: Fup/Dieese (2016)

As a result of its political influence in Brazil, the financial institutions have encouraged its investors to benefit from the interest rates arbitrage opportunities. Consequently, the US dollar exchange rate has experienced significant appreciation during 2016. This financial movement have imposed additional losses to all the governmental entities, with additional restrictions on royalties.

  1. Debt and Royalties

The amount due to federal state banks in the total debt repayments of the state of Rio de Janeiro summed R$ 986 MM from January to September 2016. It represents 70% of the total debt payment flux in the same period (30% due to foreign multilateral banks) – Table 4.

The debt under federal government control was contracted in order to implement investment projects. These set of projects envisaged to increment the local tourism as part of a long run strategy (world cup and Olympic game). These investments should be inexorably realized, as necessary interventions on the public transportation system or revitalization of public spaces, among others.

In this sense, the debt was contracted by the state governments to realize important urban interventions and the corruption, if any, will always be a small part of the total investment. What cannot be presented to society is that the investments should not have been implemented. The federal banks were directly responsible for these investments and no planning effort was made to improve the development of projects.

 Table 4 – Debt service breakdown jan/sep 16 – state of Rio de Janeiro

BNDES 442.305.158
BANCO DO BRASIL 381.018.455
National Treasury 985.980.188
BID 119.182.083
JBIC 32.785.317
BIRD 112.829.385
CAF 115.337.542
AFD 30.196.281
Total 410.330.608

Source: Sec. de Faz. RJ

As shown in Figure 3, most of the Brazilian states worsened their financial situation since 2014. The Rio de Janeiro state anticipated this by at least 1 year. In the beginning of 2015 the RJ state surpassed the limit of 2 considering the relation between consolidated debt and income revenues.

Figure 3– Debt index evolution for selected Brazilian states


Source: Sec Faz. RJ

On the other side, when one looks at the relation between the consolidated debt and the gross product for each state, what is found contradicts the severity expected for the RJ state financial crisis. As can be seen in Table 5, the leverage of the RJ and SP states are comparably low when put side to side to MG or RGS.

 Table 5 – Debt to income relation for selected states

State Consolidated Debt (Bi) Gross Product (Bi) Debt /GP
São Paulo 235,6 1.607 15%
Rio de Janeiro 101,3 619 16%
Minas Gerais 102,6 458 22%
Rio Grande do Sul 68,5 320 21%
Bahia 16,2 201 8%

Source: IBGE

The monthly range of royalties flow to the state of RJ (145 to 200 million Reais) approximately offset the average R$ 380 million monthly disbursements for financial services and amortization of debt. Briefly, if and when the oil prices recover to a historical average the financial situation of the Rio de Janeiro state would be self-solved.

Conclusively, the liquidity difficulties faced by the Rio de Janeiro state have been derived by: (i) depression in economic activity due to the political instability, which caused significant reduction in taxes payed; and (ii) depression in oil prices and not high labour wages.

What could be a solution to the serious Brazilian crisis is a planning process led by the federal government towards project development in cooperation with state governments. The federal banks have enough human and financial resources to help state management to develop these investment projects. This planning could help state management to identify opportunities and improve the quality of services.

Instead, the most important threat RJ state government face at this moment is to surrender to the easy solution presented by banks. They offer securitization of future earnings due to royalties expected flux of money. But one thing is not frequently detailed by banks: as soon as the dollar price of oil climb up again, the state governors will not benefit from it. The bankers will. The deal is such as that: state governors sell the future by the lowest price of the whole time series.


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