Brazil: Government cuts surplus goal as economic prospects continue to erode
August 6, 2015
Brazil’s government asked Congress to approve a significant reduction to its 2015 primary budget surplus target on 22 July following a return to contraction in the first quarter and months of gloomy economic data. The government revised the fiscal target from a primary surplus of 1.10% of GDP (BRL 66.3 billion) to a meagre 0.15% of GDP (BRL 8.7 billion) surplus largely due to the contracting economy, which has caused government revenues to plummet. While market analysts had expected a downward revision—the old targets were no longer feasible—the magnitude of the revision was larger than anticipated. Moreover, there is still a large possibility that the government could come up short or that the target could be revised downward further as a number of bills designed to bolster state revenues still need to be approved by Congress.
Following the government’s announcement, more negative news emerged surrounding Latin America’s largest economy. The real plunged to a 12-year low as sentiment about Brazil’s economic prospects withered further. In addition, Standard Poor’s Rating Services (S&P) revised Brazil’s outlook from stable to negative and held its sovereign-debt rating just one notch above junk status. S&P cited the weaker-than-expected economic performance and challenging political circumstances as the main reasons for the downgrade. S&P also signaled that Brazil’s rating status could be downgraded if there is a further deterioration in fiscal or external imbalances, or from a lack of political will to follow through with austerity measures. A downgrade could further diminish investor confidence and raise the country’s borrowing costs, thus adding to the country’s laundry list of economic troubles.
One of the aspects at the heart of Brazil’s declining economic sentiment is increasing political uncertainty. President Dilma Rousseff’s approving ratings have fallen to all-time lows as her administration has been rocked by corruption scandals and dismal economic data. As a result, Rousseff is facing increasing hostility in Congress, which is challenging her administration’s success in passing key austerity measures and economic reforms. On 6 August, two political parties that are members of Rousseff’s ruling coalition broke away from the government and announced that they would act independently going forward. The split is a setback for Rousseff, who has a number of spending bills in the voting pipeline. In addition, a day of protests against Rousseff is being planned for 16 August; this could further embolden opposition in Congress.
At this point, it remains unclear whether the government will be able to balance its books or turn around the economy. Taking recent developments into account, LatinFocus Consensus Forecast panelists revised their forecast for Brazil’s fiscal deficit. The panel now expects the fiscal deficit to tally 6.3% of GDP in 2015, which is a 0.2 percentage point larger deficit than last month’s forecast. For next year, the panel sees the deficit narrowing to 5.0% of GDP.