Monday, 2 March 2009

Brazil Fiscal Policy Shows Signs of Slippage; Debt/GDP Ratio Up, Primary Surplus Down. Will Lula's Counter Cyclical Policy Efforts Pay Off?

The Banco Central do Brasil Friday unveiled its monthly fiscal report, and numbers were horrible -- worst than most market participants actually expected. The consolidated public sector posted a 5.2 billion real primary surplus (the difference between revenues and expenses without including debt payments. The number provides investors with a gauge of the country's willingness to accumulate long-term cash to reduce debts.) The number came below most market forecasts -- and was way smaller than the surplus posted in Jan. 2007 -- Goldman Sachs Group Inc. estimated the year-on-year decline at $13.5 billion!

The decline in the primary surplus reflects, according to the central bank report, a dramatic drop in government revenues (tax collections, tax breaks, lower royalty incomes, etc.) and a 16 percent jump in spending. We have extensively covered this issue in MM; we have also lashed out at the evident excesses of the economic salvage package. The primary surplus for the 12 months ended in January tumbled to 3.6 percent of gross domestic product -- below the 3.8 percent target for 2009. On the other hand, the consolidated nominal fiscal deficit (which includes interest payments -- yes Brazil runs a huge deficit!!!) widened to 2 percent of GDP from 1.5 percent in December. Just in one month an increase of half a point of GDP is at the very least quite worrisome.

Public debt jumped to 36.6 percent of GDP at the end of January from 36 percent of GDP in December. The government, with its push to avoid the inevitable through the irresponsible use of fiscal policy instruments, is undoing the good things it did for six years. We insist that from now on investors will be more stringent in their assessment of countries' fiscal situation. Brazil has a serious structural fiscal problem -- the government seemed to have forgotten that -- especially Finance Minister Guido Mantega, whose dream has always been the resurrection of Keynesian-like economics in a country where the state, given its huge size, crowds out the private sector in the competition for funding, tries to intervene in every single aspect of the private economy and, to add insult to injury, charges the highest tax rates in the hemisphere. We work four and half months of the year for only to pay the government our tax bill.

So we reiterate this, once again: The number and the policies are negative for the country, both short- and long-term. The data is reinstilling concern that the fiscal policy framework will undergo a serious test of faith along 2009. That markets have been misreading this or overlooking the date is a problem, but a change in their stance towards a more stringent one is a matter of time. Goldman Sachs is forecasting a drop in the primary surplus to 2.7 percent of GDP this year! Oh! Minister Mantega, a.k.a Criswell: Rating agencies will have an eye on these very ... awful numbers.

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