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Brazil Fiscal April 2020

Brazil: Government announces war budget to combat coronavirus economic fallout; investors on edge over burdensome debt load

In early April, the Brazilian government announced it would create a “war budget” to tackle the domestic economic fallout from the global coronavirus pandemic. The plan would separate any emergency Covid-19 spending from the government’s federal budget and not be held to traditional fiscal laws, reducing budgetary constraints. The Lower House of Congress approved the measures on 4 April; however, the first round of voting in the Senate failed on 15 April and the bill will have to return to the Lower House after the Senate’s approval for a second round of voting on amendments made by the Senate. Investors and credit ratings agencies will be closely monitoring the impact on the public accounts, which could lead to a ratings downgrade.

Although the exact nominal value of the budget has not been confirmed, authorities estimated total measures could amount to BRL 600–800 billion, which would equate to about 6–10% of GDP. Moreover, the bill would enable the Central Bank to purchase bonds in the secondary market to stabilize financial markets—marking a transition towards quantitative easing. The new budget should provide some relief to the most-affected sectors and individuals, but will likely not be enough to avert the looming recession.

The introduction of the extraordinary emergency budget comes after the government voted to abandon its fiscal deficit target of around 5.5% of GDP for 2020 and invoked an escape clause on the constitutional spending cap. Authorities have already announced a series of response measures totaling approximately 6.5% of GDP, including the expansion of the “Bolsa Familia” program, which is targeted at Brazil’s poorest families; an advance payment of social benefits; financial assistance for states and municipalities; and certain tax deferrals. That said, the total amount of new spending will be lower as some measures consist of guaranteed loans and credit lines.

The government has little policy space to maneuver without derailing progress made on fiscal consolidation in recent years. Brazil’s public debt remains one of the highest among emerging market economies. A fall in government tax revenues amid the economic slump and low global oil prices weighing on royalty proceeds will exacerbate the deterioration in Brazil’s fiscal position this year. Moreover, whether the government will recommit to fiscal austerity and the reform agenda when the pandemic dissipates is an added uncertainty. If Brazil’s fiscal performance suffers well beyond the crisis, its credit ratings will likely get downgraded. In fact, on 6 April S&P revised its credit rating outlook for the country from positive to stable largely on growing fiscal risks.

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