Downgrade fear as Brazil faces possible budget deficit

[Rowdy]

Brazil's Finance Minister Joaquim Levy speaks during a news conference on reducing the tax goal of the Brazilian government in Brasilia, July 22, 2015.
Brazil's Finance Minister Joaquim Levy speaks during a news conference on reducing the tax goal of the Brazilian government in Brasilia, July 22, 2015. Reuters
by Joe Leahy



Brazil's economy may be in freefall but until recently its hard-pressed citizens could at least count on the commitment of their famously hawkish finance minister to limit the damage.

Rushed to hospital last month with what local media speculated was a pulmonary embolism, involving bloodclotting in the lungs, Joaquim Levy embarked a few hours later on a flight to New York to tout Brazil to potential investors.

So when Mr Levy announced last week he was back pedalling on one of his key promises, to quickly restore Brazil's sinking public finances to good health, markets reacted with surprise. Instead of a primary fiscal surplus - the budget balance before interest payments - of 1.2 per cent of gross domestic product for 2015, Mr Levy said he would now deliver something closer to zero and left open the possibility it could turn into a deficit.

The news drove Brazil's currency, the real, to a 12-year low against the US dollar and knocked 2.18 per cent off the benchmark iBovespa stock index amid speculation over whether Brazil can maintain its investment grade rating.

João Pedro Ribeiro, a Nomura economist, said: "I don't think there were a lot of people who were considering a primary deficit as a possibility this year."

Mr Levy's struggle to meet budget targets comes as Brazil is sinking into what is set to be its worst recession in decades. Unemployment and inflation are rising and economists are downgrading growth estimates, with some forecasting a contraction as large as 2.5 per cent this year.

Dilma Rousseff, the left-leaning president, is struggling with record low approval ratings, a restive congress and a corruption scandal at state-owned oil company Petrobras. The tough environment means few analysts blame Mr Levy for the change in the budget targets or question his resolve. Yet most were shocked at the scale of the revisions.

"He remains very credible and by all accounts very committed to do the best he can," said Alberto Ramos, economist with Goldman Sachs. "But it [the revisions] show the difficulty in actually turning around the fiscal picture."

In Brazil, with its history of crises fuelled by government overspending, the primary surplus is regarded as a key indicator of how well a government is managing public finances.

In her first term between 2011 and 2014, Ms Rousseff experimented with a prolonged fiscal stimulus programme. When this led Brazil to report its first primary fiscal deficit in a decade last year, Ms Rousseff hired the Chicago-trained Mr Levy to apply shock treatment to turn the situation round. But the slowdown has eroded government revenues. This, coupled with resistance from congress and from many within Ms Rousseff's party, have forced Mr Levy to back away from his initial targets.

Last week, aside from downgrading the primary fiscal surplus target for this year from 1.2 per cent of GDP to 0.15 per cent, Mr Levy lowered the target for next year to 0.7 per cent from 2 per cent, and for 2017 to 1.3 per cent from 2 per cent. Worse, his team said if some expected revenues did not materialise this year, the primary surplus could turn into a deficit of up to 0.3 per cent of GDP.

The changes mean that Brazil's gross public debt, instead of stabilising, will rise from 65 per cent this year to 70 per cent by the end of 2017, said private bank Itaú Unibanco. This is high for an emerging market, especially given Brazil's elevated interest rates. Itaú estimated that Brazil would need a primary fiscal surplus this year amounting to nearly 35 times bigger than the target just to stop accumulating new debt.

Many believe credit rating agency Moody's is likely to join Standard & Poor's and downgrade Brazil to one notch above junk, yet there remains a consensus that Brazil is trying to move in the right direction on public finances - the concern now is the pace of change.
http://www.afr.com/news/world/downgrade-fear-as-brazil-faces-possible-budget-deficit-20150727-gil1tt
@geoBR what's up bro?