2024-04-16 15:20:42
Brazilian President Luiz Inácio Lula da Silva’s government is seeking to loosen its own budget targets as investor concerns rise about the risk of fiscal slippage in Latin America’s largest economy.
The leftwing administration has presented proposals that would water down its prior aim of achieving a primary surplus next year and in 2026. They would need congressional approval to proceed.
The original commitments were laid out a little over a year ago and underpinned Brasília’s claims of balancing responsible management of the public accounts with increased state expenditure.
But now ministers intend simply to balance the budget next year, replacing the previous goal for income to exceed outgoings by 0.5 per cent of gross domestic product.
The 2026 forecast for a primary surplus — which excludes interest payments — is also to be reduced from 1 per cent to 0.25 per cent of GDP. This will delay the stabilisation of public debt levels, according to official forecasts.
Finance minister Fernando Haddad said the deficit had been a structural problem since 2015. “Brazil is growing less because of this. Our effort is to bring order to it,” he told GloboNews TV on Monday.
Budget holes have been an Achilles heel for the South American nation before, with knock-on effects on public borrowing, inflation and interest rates.
Many analysts had already warned that the current deficit targets were unrealistic and likely to be tweaked. They were introduced as part of a new set of fiscal rules designed to boost public spending under veteran politician Lula, who began his third non-consecutive term last year.
Luiz Maciel, chief economist of Brazil macro at Bahia Asset Management in Rio de Janeiro, said the proposed amendments nevertheless sent a “negative message”.
“It is yet another demonstration that this is not a government willing to guarantee the [stabilisation] of public debt. There is a consensus in the market that the government is wasteful,” he said.
The Brazilian real slipped to its lowest level against the US dollar in more than a year on Tuesday, trading at 5.27 against the greenback.
Investors have expressed growing concerns about Brazil’s economic approach under Lula, who was credited with anti-poverty programmes during his previous terms between 2003 and 2011.
Some see warning signs that there could be a repeat of mistakes that marred the previous period of rule by his Workers’ party, or PT, which ended in a fiscal crisis contributing to the country’s worst recession on record.
Sérgio Vale, chief economist at MB Associados, criticised a “poorly designed” fiscal policy reliant on increasing receipts — mainly through taxes, often subject to factors such as growth that were outside the government’s control — rather than cutting costs.
The framework launched a year ago stipulates that public spending must increase every year above inflation, in a band between 0.6 and 2.5 per cent. Overall budget expansion is limited to 70 per cent of revenue increases.
This replaced a previous, tougher rule that restricted annual expenditure growth to the rate of inflation. That was deemed fundamental to stability by investors but ended up politically unpopular.
“The government will have to do something far more drastic to deliver a zero deficit. But it has low popularity and wants to invest and spend more,” said Vale. “The consequence of this poorly calibrated fiscal [arrangement] is to worsen long-term interest rates, which makes investments more inexpensive and harms growth.”
In his bid to raise living standards following a decade of stagnation, Lula has increased welfare payments and the minimum wage, while unveiling a major public works programme.
His critics say this will force up public borrowing, which was already relatively high for a developing economy at 75.5 per cent of GDP in February.
Sceptics of the loose fiscal stance also fear it could stir inflation and impede the central bank’s ability to keep cutting interest rates. Lula has attacked the institution’s monetary policy as a drag on growth.
The bank’s governor, Roberto Campos Neto, said on Monday that “the ideal is not to change the [fiscal] targets”.
“Whenever you have a change in the government, that makes the fiscal anchor less transparent or less believable . . . So the cost of monetary policy becomes higher,” he told an event in the US.
The opposition decried the move as evidence of fiscal irresponsibility, but analysts argue the changes will pass the conservative-dominated congress thanks to the greater funds they will probably make available for lawmakers.
Gil Castello Branco of Contas Abertas, an NGO that scrutinises the public accounts, linked the looser rules with municipal elections due in October. “In an election year, there won’t be any resistance to changes to relax the rules and increase spending,” he said.
Some investors remain optimistic. Despite Brazil recording its second-largest-ever deficit in 2023, at 2.1 per cent of GDP, this year’s goal of eliminating the shortfall remains intact, helped by one-off windfall receipts. The targets have a tolerance of 0.25 per cent on either side.
Jared Lou, portfolio manager at William Blair, said Brazilian local assets were still attractive. “Lula we view as a pragmatic leftist leader. He will continue to try and strike a balance in maintaining macro[economic] stability and his social goals.”
Felipe Camargo, senior emerging market economist at Oxford Economics, said that after he impressed financial markets in 2023, Haddad’s reputation was likely to take a hit. “The fact that he couldn’t win the battle to keep the fiscal targets for the upcoming years weakens his credibility,” Camargo said.
Additional reporting by Isabela Fleischmann
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