Prospects for state credit risk in Brazil: An analysis of the probability of default

Abstract

As public indebtedness reached record levels in 2021, and economic crises increase public entities’ need for financial loans, credit risk stands out as a useful metric for potential creditors, and for the entities themselves, regarding the management of their liability portfolio. This paper assesses, for the short term, the prospects for state credit risk, focusing on the probability of default. The methods used combine projections resulting from the application of panel data modeling with Monte Carlo simulations, taking as reference concepts related to the sustainability of public entities for determining the risk of default. Results indicate the persistence of a negative condition for most states, and the possibility of grouping entities at different levels of credit risk. In addition, we achieved a practical, alternative, and complementary tool for the analysis of subnational credit risk in the short term.