Oil crisis worsens Rio's trouble

The state of Rio de Janeiro expects to collect little more than $18 billion and spend $24 billion in 2016, which will mean a deficit of about $6 billion. The shrinking tax revenue and the adverse effects of Brazil's economic downturn are cited by the state government among the factors leading to its financial woes.

The falling oil prices that knocked down revenue from petroleum royalties paid by oil companies to the government have added to the economic crisis in the state. Experts heard by Agência Brasil said the state has become too dependent on royalty money, failed to invest in other economic sectors, and misused the resources coming into the state coffers for years. Now, with no money to honor its commitments, the state government is looking for new sources of revenue and relies on a federal bailout.

Alexandre Szklo, an Energy Planning Professor at the Federal University of Rio de Janeiro (UFRJ), said the state was already facing a financial crisis when the discovery of petroleum in Brazil's pre-salt layer in 2007 boosted an oil production and exploration boom. Now, with the low oil prices, the problems are back again, and worse.

“Rio is relapsing into crisis again, and it has become more complex, because the population is now bigger, the economy is bigger. The services demanded by the population and needed by the state are much more complex today than before the oil boom,” Szklo said.

The falling prices and project cuts at Petrobras have adversely affected the oil supply chain, and this has taken a toll on tax revenue. Oil royalties have also dropped 38% in 2014-2015, and in 2016, they are expected to fall 60% as against two years ago.

Professor Szklo said that the state was heavily dependent on the oil industry and has not braced itself for a market downturn. “In fact, there has been a boom cycle, and then a tragedy cycle.” He admits it is very difficult to tell how the oil prices will behave, but says “the state of Rio de Janeiro should have braced itself for that.”

John Forman, former director of the National Petroleum Agency (ANP), contends the perception that the falling royalty revenue was the biggest adverse impact for the government coffers. For him, even though the barrel prices have dropped in the global market, the dollar hike in Brazil would offset that. “There has been a significant hike in the dollar rate, which partially made up for the losses from prices,” he told Agência Brasil.

For Forman, the royalty money was misused. “Royalties have been used as a source of funding for recurring costs for a long while now. When you use a source [of funding] that is not permanent for recurring costs, you will be in serious trouble if this source fails. If the money had been used on improving health services, on hospitals, on security, we would have all these now. But the money was used for payroll costs, which in itself cannot create new things,” he said.

Federal bailout

For the State Secretary of Finance of Rio de Janeiro, Júlio Bueno, “the federal bailout will be crucial to allow Rio state to move out of this crisis.” José Roberto Afonso, a researcher at the Getúlio Vargas Foundation (FGV), agrees: “Even with [state] spending growing at a slower pace less than federal spending, the royalty-driven revenue drop was so massive that Rio is on the verge of bankruptcy. There's no choice but federal bailout,” he said.

Bueno pointed out that the state deficit is “essentially caused by state pensions, which account for over 70% of the deficit. We need to spend $5.5 billion on Social Security this year but our revenue is $1.5 billion,” he said.

One of the main consequences of the crisis has been delays paying wages and pensions. These delays have prompted a court to attach funds from the state coffers to the payment of wages and pensions, and the payment calendar had to be changed twice.

Translated by Mayra Borges