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Brazil Limits Public Spending to Shore Up Investors' Trust

Thursday, 08 Jan 2015 09:42 AM

(Updates with economist comment in 10th paragraph.)

(Bloomberg) -- Brazil’s federal government capped spending even before Congress approved its 2015 budget in an effort to showcase its fiscal discipline in President Dilma Rousseff’s second term.

The government trimmed by 1.9 billion reais ($710 million) the amount of money it can spend a month, according to a statement posted on the Planning and Budget Ministry’s website. The move represents a 33 percent cut to the upper limit of some expenditures. Spending regulated by the Constitution and scholarships funded with public resources, among other key items, were excluded from the measures.

Facing the risk of a further credit rating downgrade, the Rousseff administration has cut pension and labor benefits and reduced credit subsidies to help meet a primary budget surplus target, which excludes interest payments, of 1.2 percent of gross domestic product this year. Since Rousseff first took office, the nominal budget deficit more than doubled to 5.8 percent of GDP and the country’s credit rating was downgraded for the first time in more than 10 years.

“This is another measure in the right direction. By itself it isn’t enough to make the government fulfill the 1.2 percent target,” Enestor dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria, said by phone from Madrid. “We need more, and we’re going to get more.”

Swap rates maturing in January 2017 fell five basis points, or 0.05 percentage point, to 12.56 percent at 12:03 a.m. local time on the fiscal measure and a report showing industrial production contracting. The real weakened 0.6 percent to 2.6977 per U.S. dollar.

Higher Taxes

Finance Minister Joaquim Levy signaled this week that he could increase taxes as part of his plan to narrow the budget deficit. On Dec. 29 the government announced cuts to pension and unemployment benefits that will save an estimated 18 billion reais.

“We’re starting on the spending side,” Levy, 53, said Jan. 5 after succeeding Guido Mantega at the start of Rousseff’s second term. “Eventually, we could consider some adjustments on the revenue side.”

He said heightened fiscal discipline will help reduce borrowing costs, strengthen Brazil’s credit rating, and pave the way for economic recovery.

Sluggish growth and a widening budget deficit prompted Moody’s Investors Service in September to cut Brazil’s credit outlook to negative. Moody’s rates Brazil Baa2, two levels above junk. Its move came six months after Standard & Poor’s reduced Brazil’s rating to one level above junk.

‘By-the-Book’

“We are returning to by-the-book fiscal policy, with a realistic target, transparency and good fiscal results at the start of the year,” Carlos Kawall, chief economist at Banco Safra and a former Treasury secretary, said by phone from Sao Paulo.

Levy is shoring up government accounts as the central tightens monetary policy to slow inflation. Policy makers have raised the benchmark rate twice since Rousseff won re-election, to 11.75 percent, the highest level since October 2011. Economists surveyed by the central bank Jan. 2 forecast the Selic will reach 12.5 percent by year-end.

Annual inflation in the year through mid-December slowed to 6.46 percent, within the central bank’s target range. The bank seeks inflation of 4.5 percent, plus or minus two percentage points. The statistics institute will release full 2014 inflation data tomorrow morning after industry production data released today surprised analysts, contracting in November by the most since June.

Industrial Output

Brazil’s industrial output fell 0.7 percent, after a revised 0.1 percent increase in the previous month, the national statistics agency said today in Rio de Janeiro. The drop compares with a median estimate of a 0.5 percent increase from 40 economists surveyed by Bloomberg.

Latin America’s biggest economy expanded 0.2 percent last year, the slowest pace in five years, according to economists surveyed by Bloomberg. The economy will grow 0.85 percent in 2015, about half the rate for Latin America, the survey shows.

“It’s probable we will have a technical recession in the first half of 2015,” Thais Zara, chief economist at Rosenberg Consultores Associados, said by phone from Sao Paulo. “I think that things will get worse before they get better.”

While the government waits for Congress to approve the 2015 budget, it can spend as much as 1/12th of its original proposal per month. The decree published today limits the spending on some items to 1/18th of the total.

--With assistance from Arnaldo Galvao in Brasilia Newsroom.

To contact the reporters on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net; David Biller in Rio de Janeiro at dbiller1@bloomberg.net To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Harry Maurer

© Copyright 2017 Bloomberg News. All rights reserved.

 
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