Brazil Needs 'Game Changer' on Fiscal Front to Regain Credibility

Wednesday, 03 Jul 2013 03:28 PM

 

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Brazilian President Dilma Rousseff needs a bold new plan to keep spending in check if she wants to reassure skeptical investors at a time when inflation and market turmoil risk derailing an economic recovery.

In a change of tone, the Rousseff administration has vowed to restrain spending and even hike taxes if needed to meet a key fiscal target this year after more than two years of aggressive stimulus.

Finance Minister Guido Mantega is finishing up the details on a plan to cut as much as 20 billion reais ($8.84 billion) from this year's budget to show markets the government is serious about saving cash, administration officials told Reuters.

While economists cheered the change in tone, they say the steps might fall short of what is needed to regain investor confidence.

"The government is behind the curve, so it needs to do something bolder than expected, it has to surprise us positively," said Carlos Kawall, chief economist with Banco Safra and former head of Brazil's National Treasury. "You either regain credibility or your economy doesn't grow. There is no middle ground ... you need a game changer."

The government has sounded out the idea of scrapping the primary budget surplus target for a more aggressive goal that brings the overall deficit to zero in coming years. However, some policymakers say that ambitious goal could strip the government of a valuable arsenal to face a weak global economy.

The drive to bolster lackluster economic activity led the government to step up spending, hand out billions of dollars in tax cuts and even relax tough fiscal rules considered the backbone of Brazil's newfound economic stability.

The stimulus did little to support an economy that is likely to post a third straight year of subpar growth, but did stoke inflation to levels that have begun to weigh on the country's main growth engine: consumption.

Although Brazil's debt levels are much lower than those of some European countries, its expansionary stance forced the central bank to lift interest rates from record lows and prompted warnings from ratings agencies.

WEAK FINANCES, WEAK ECONOMY

The wake-up call for the government came from Standard and Poor's. In June the ratings agency cut Brazil's rating outlook to "negative" from "stable" due to weakening public finances.

The ratings company went further on Wednesday, saying a rash of street protests could push the government to spend more and increase its debt burden.

The unexpected wave of demonstrations over a range of issues from poor public transportation to inadequate healthcare has raised spending pressures and threatened to hurt the investment needed to lift an economy that some economists expect to grow just 2 percent this year.

To appease protesters some authorities have revoked bus and subway fare increases and frozen toll road and electricity rate hikes, raising worries among investors about regulatory risk in a country seeking to lure more than $100 billion in private cash to fix roads, ports and airports.

"This could not come at a worse time," Carlos Thadeu de Freitas, a former central bank director, told Reuters. "At this moment you need all the investment you can get. Brazil needs to regain investors' trust and the wave of freezes will do the opposite."

NO ACCOUNTING GIMMICKS

Rousseff has promised to maintain public investment and called on authorities to stay fiscally prudent despite the protests, vowing to achieve an already lowered primary surplus target equivalent to 2.3 percent of gross domestic product.

Originally, the government had set the goal at 3.1 percent of GDP, but a sharp drop in revenue after the flurry of tax breaks pushed the target down. The primary surplus represents the public sector's excess revenue over expenditures before debt payments.

"The government is making an important first step," said Thais Marzola Zara, chief economist with Rosenberg & Associados. "Now they need to hit the goal without any accounting gimmicks."

Last year the government transferred cash from a sovereign fund and anticipated dividends from state-owned companies to fatten its coffers in order to lift the primary surplus results.

Earlier this week the government changed dividend rules to allow its giant development bank, BNDES, to channel more dividends to the Treasury.

The finance ministry has denied that the change in rules aims to increase its dividend intake to bolster its primary surplus.

© 2014 Thomson/Reuters. All rights reserved.

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