Wednesday, 1 April 2009

Brazil and Some Details About the Fiscal Numbers for February

Those who read this blog regularly probably know that I am not especially a fan of Brazil's government, its very ambiguous economic policy framework and particularly its management of the fiscal situation. This time I won't defend the awful administration of public finances by Criswell, the lousy finance minister who assured his countrymen that the global crisis would only touch Brazil marginally, be just a ''marolinha´´ -- a roller, a shallow wave. What an idiot. The economy posted its worst quarterly contraction in the fourth quarter and is going straight to recession.

Well, the thing here is, yesterday the government announced that the consolidated primary budget surplus, or the excess of revenues over expenses excluding debt payments, narrowed by 66 percent in the first two months -- amounting to about 2 percent of gross domestic product in relative terms. The accumulated result is certainly bad. I listened to some radio and specialised TV programmes predicting the fallout of Brazil and some doom scenarios. The numbers are certainly worrisome, but we have to take into account some aspects in the bottom line that should keep readers cool about the (deteriorating yet far from end-of-the-world-like) fiscal position of the Brazilian government.

The primary surplus was 4.1 billion reais in February, narrowing from 5.1 billion reais in January -- and without a doubt, a couple of disappointing monthly results. The numbers were though better than the market’s average estimate surplus of about 1.2 billion reais. Furthermore, the consolidated nominal budget deficit narrowed to 6 billion reais in February from January's 9.2 billion shortfall. All in all, a whooping 10.1 billion reais in interest payments were to blame for the sizzling back-to-back deficits. Despite the fact that the primary surplus was about half the value of February 2008's 9 billion real surplus, my guess is that, once you take a look at the figures unveiled by the central bank yesterday, there is an improvement on the margin in the interest/GDP ratio. This is consistent with recent declines in domestic borrowing costs and especially, the reduced weight (sensitivity if you like it) of currency fluctuations on debt dynamics. Anyways, taking into account the awful erosion of tax collections during the past five months and the irresponsible increase in expenses sponsored by that lousy finance minister and related to the government’s economic salvage plan, the data in my view was not that worrisome.

Nonetheless, be sure that at some point the same rating agencies that were quick to see Chile's strength and especially comfortable fiscal and external position to award the nation an increase in debt ratings, will be quick enough to spot the weakest aspects of Brazilian policy making -- which we believe is erratic and desperate in our view. We believe that at some point the rating agencies that awarded Brazil investment-grade last year will begin revising their stance -- it would surprise me if they at least don't send a warning on Brazil's deteriorating fiscal numbers.

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