Brazil’s 2016 budget intensifies fear of financial crisis

A growing deficit and political divisions leaves Brazil on the brink

An inflatable doll depicting former Brazilian president Luiz Inacio Lula da Silva in prison attire during a recent protest against Brazil’s President Dilma Rousseff in São Paulo. photograph: paulo whitaker/reuters

An inflatable doll depicting former Brazilian president Luiz Inacio Lula da Silva in prison attire during a recent protest against Brazil’s President Dilma Rousseff in São Paulo. photograph: paulo whitaker/reuters

 

Brazil’s transformation from investment community darling to black sheep gathered pace this week as evidence mounted that the country’s political class is too divided to come up with a strategy to avoid a looming fiscal crisis.

Facing a deepening recession that has devastated tax receipts, President Dilma Rousseff sent congress her budget for 2016 which, for the first time since the exit from hyperinflation in the early 1990s, forecasts a primary fiscal deficit of 0.34 per cent of GDP.

The projected shortfall follows the failure to deliver on a small surplus for this year and leaves the left-wing president open to charges that she is breaking the country’s fiscal responsibility law which demands that Brazil’s traditionally spendthrift governments live within their means.

More immediately, the 2016 budget intensified fears that the risk of a damaging sovereign downgrade to junk status is rising. Markets have reacted to the budget details by selling the local real for dollars, which has gained 70 per cent against it in the last 12 months.

Brazil’s debt to GDP ratio stands at just 65 per cent, significantly lower than many developed economies. But its history as a serial defaulter, with nine sovereign defaults since independence in 1821, means creditors remain particularly sensitive to any deterioration in the Brazilian government’s debt dynamic. They have been spooked by the ratio’s steady rise from 53 per cent in 2011 with economists projecting it will hit 70 per cent in the near future.

Against that darkening background, a potential deficit next year worries investors. Brazil would have to tap markets to meet all interest payments when its unreliable credit history helps push its borrowing costs above 14 per cent, the highest of any major economy.

The administration tried to calm market fears by claiming its 2016 budget was provisional and it would seek congress’ help in raising new taxes to plug the deficit. But the budget is now set to become the latest front in a bruising battle for power between President Rousseff and congress.

Congressional leaders however have indicated they would not be willing to help her shore up the country’s books.

“It is not the job of congress to eliminate the deficit or to resolve the question of costs,” said senate president Renan Calheiros.

Congressional opposition has already derailed Ms Rousseff’s efforts to revive an unpopular financial transaction tax as an emergency measure to help close the country’s accounts, leaving her casting around for other means of bridging the fiscal gap.

Already the administration has announced plans to reduce the number of federal ministries by 10 to 29 and has put 700 government properties up for sale as well as minority stakes in five major airports.

Austerity

The lower house is now threatening to vote through more such measures as it looks to capitalise on the president’s record low poll numbers and divert attention away from the indictment of several of its leaders in the Petrobras scandal which revealed corruption at the state-owned oil giant.

If passed these bills would threaten to double the size of next year’s fiscal hole unless matched by tax increases.

This week’s budget bill is seen as a defeat for Joaquim Levy, the increasingly embattled finance minister. He has been tasked with restoring order to the public accounts after the disarray provoked by the government’s counter-cyclical response to the 2008 global financial crisis, in which it upped spending while cutting taxes in order to support growth.

The strategy provided diminishing returns at huge cost before being killed off by the recession which started last year. In response, Mr Levy has advocated slashing government spending in order to defend the country’s investment grade rating since he took up the job at the start of the year. But he was overruled on the budget by the president who sided with her planning minister Nelson Barbosa. He argues that further spending cuts would inhibit the economic growth necessary to exit the downturn.

Central bank

Alexandre Tombini

Earlier on Wednesday disastrous industrial production numbers released for July showed the country’s industrial base has shrunk back to its 2009 size after a 17th consecutive monthly decline.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.