South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
These are some of the words that analysts are using to describe the emergency R$65bn package of budget cuts and tax increases unveiled by Brazil's beleaguered finance minister Joaquim Levy late yesterday afternoon.
The proposals, which include spending cuts and the reintroduction of a financial transaction tax, are aimed at warding off further credit downgrades following Standard & Poor's shock move to strip the country of its coveted investment grade rating last week.
While news of the measures helped the real rally 1.43 per cent against the dollar and pushed the benchmark stock index, the Ibovespa, 1.9 per cent higher yesterday, analysts were by and large sceptical about the government's ability to deliver on its plans.
Neil Shearing, chief emerging markets economist at Capital Economics, said Brazil's latest fiscal measures won't change the bigger picture.
The latest raft of fiscal austerity measures announced by Brazil's government are clearly aimed at stabilising financial markets following last week's downgrade by S&P, but in practice are unlikely to do much to restore the public finances to health.
Mr Shearing said while the size of the package looks impressive at first sight, in practice there are good reasons to expect actual budget savings to fall well short of government projections.
Part of this is political, with measures diluted in order to pass Congress. But in addition, Brazil also seems to be stuck in an austerity trap, whereby the weak economy makes it increasingly difficult to generate budget savings.
The view was echoed by analysts at Barclays:
The government's lack of credibility is so low that only announcing measures should not be enough to change the market's mood. Despite the economic team's efforts to revert the uncertainties toward fiscal execution, we believe that the risks of approving these changes are very high, given this government's poor political coordination.
President Dilma Rousseff is fighting for her political survival as her government struggles to turn round a deepening recession and quell a growing political crisis. Investors are also increasingly questioning the credibility of her economic advisers. Yesterday's announcement was the third time in two months the government has changed its targets for the 2016 primary fiscal surplus.
As Mr Shearing from Capital Economics put it:
We're left with the impression that the government is now scraping the barrel in an effort to plug its budget hole. Indeed, the latest measures reveal more about the impotence of the government in being able to constrain spending than anything else. We expect a large primary deficit this year (c1% of GDP) and a small primary deficit next year (c. 0.3% of GDP). In these circumstances, the public debt-to-GDP ratio will rise further – and further downgrades seem likely.