Brazil revealed its worst monthly fiscal deficit since records began on Friday, underscoring the challenges facing incumbent president
Dilma Rousseff after she was re-elected on Sunday for a second term.
Brazil’s real weakened 2.14 per cent to R$2.45 against the dollar on news the overall public sector deficit in September was R$69.4bn, the worst monthly reading since the data series began in December 2001. The country also recorded its first primary budget deficit – the balance before interest payments – for the first nine months of the year, at 0.4 per cent of gross domestic product.
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“These numbers suggest that, without a very strong adjustment, Brazil risks losing its investment grade status,” said Tony Volpon, economist with Nomura, in a research note titled “Fiscal Meltdown”.
Brazil’s president won
re-election by one of the narrowest margins in the country’s history and now must set back in order an economy that has all but stalled this year.
To try to reignite growth, her government over the past four years has implemented ad hoc tax breaks and price controls and tried to push down lending rates, but to little avail.
The economy is expected to have grown at its slowest rate since the early 1990s, slipping into recession in the first half of this year.
Critics have accused Ms Rousseff’s government of being lax with some of the principles that have maintained Brazil’s economic stability since the 1990s, including tight control of inflation, running a primary fiscal surplus to control public debt and letting the
exchange rate float freely.
While inflation was above the upper limit of the central bank’s target range of 6.5 per cent in September, the primary fiscal deficit – the fiscal balance before interest payments – also exceeded expectations at R$25.491bn.
Brazilian bank
Itaú-Unibanco had estimated it would be half that figure.
Brazil has in recent years sought to maintain a primary fiscal surplus of about 3 per cent of GDP, the level considered sufficient to pay down part of its debt and meet its interest obligations.
The public sector primary surplus on a 12-month basis was now tracking at 0.61 per cent of gross domestic product compared with the government’s forecast of 1.9 per cent for 2014.
“The central government is showing an increasing inability to control primary spending. While net revenue grew 6.4 per cent year-on-year during January to September, primary spending grew at a much higher rate of 13.2 per cent,” said Alberto Ramos, economist with Goldman Sachs.
Gross public debt has begun increasing rapidly, to 61.7 per cent of GDP in September from 56.7 per cent in 2013 and 53.4 per cent in 2010.
These numbers suggest that without a very strong adjustment Brazil risks losing its investment grade status
- Tony Volpon, economist with Nomura
Mr Volpon suggested the government had delayed some of the bad news from August to September so that the numbers would not come out before the election.
But he said the “terrible” numbers on the fiscal front might help the more reform-minded in the government.
“The fiscal deterioration seen in 2014 will probably strengthen the hand of those within the government and the Workers’ Party who are pushing for the adoption of strong fiscal adjustment despite the election assurances that this was not necessary,” he said, referring to Ms Rousseff’s ruling PT party.
