Oct. 30 (Bloomberg) -- Brazil’s budget deficit widened more than expected in September to a nine-month high as the government carried out its stimulus plan amid falling revenue.

The deficit, including the federal government, local governments and state companies, widened to 22.4 billion ($13 billion) from 8.16 billion reais in August, the central bank said in a report distributed today in Brasilia. Analysts expected a gap of 12 billion reais, according to the median of three forecasts in a Bloomberg survey. It was the widest gap for the month of September since the series started in 2001.

President Luiz Inacio Lula da Silva, in a bid to revive a flagging economy, boosted public spending amid falling revenue, widening the country’s budget deficit. Net debt as a percentage of gross domestic product rose to 44.9 percent in September from 44 percent in the previous month.

“Even though the government says the budget numbers will improve in the coming months, so far all we’ve seen is a steady deterioration,” said Zeina Latif, chief economist at ING Bank NV in Sao Paulo. “It’s another bad result.”

Latif said that steady expansion of government spending, especially for hiring and wage increases, puts pressure on the central bank to raise rates to avoid a return of inflation.

“Part of the premium on the long end of the yield curve is being caused by expansionary fiscal policy,” she said.

The yield on the interest rate future contract for January 2011 delivery, the most actively traded on Sao Paulo’s Bolsa de Mercadorias & Futuros, rose three basis point to 10.29 percent at 11:57 a.m. New York time. The July 2011 contract rose to 11.14 percent from 11.10 percent yesterday.

‘Fiscal Standards’

Brazil in April reduced its primary surplus target for 2009 to 2.5 percent of GDP from a previous 3.8 percent to allow for higher spending amid the country’s first recession since 2003.

Five months later, the Budget Ministry extended the group of investments it can book as part of the primary surplus to as much as 28.5 billion reais to avoid curbing expenses.

A steady decline in net debt ratios from 56 percent of GDP in 2002 compelled Standard & Poor’s to award the world’s largest emerging-market debtor its first-ever investment grade rating on its dollar-denominated debt last year.

“A further relaxation of fiscal standards in light of the strong growth displayed by several sectors of the economy” might “puzzle” investors, Alvise Marino, an emerging market economist for IDEAglobal Inc. in New York wrote in a note to clients.

Common Ground

Brazil posted a budget deficit before interest payments, known as the primary result, of 5.76 billion reais last month. Analysts expected a 1.1 billion-real surplus, according to the median forecast in a Bloomberg survey.

“Falling net revenues without the correspondent reduction of expenditures are behind such unpleasant fiscal dynamics,” Diego Donadio, a senior analyst for Latin America at BNP Paribas in Sao Paulo, wrote in a note to clients today.

In the 12 months through September, the deficit expanded to 127.4 billion reais, the widest in the history of the series.

“Fiscal accounts got worse just about everywhere in the world and investors won’t leave Brazil because of that,” Marco Maciel, chief economist at Banco Pine, said in an interview at Bloomberg’s office in Sao Paulo.

Yesterday, Finance Minister Guido Mantega extended a stimulus tax cuts on home appliances even as an economic recovery shows signs of gaining momentum.

Calculations

Brazil emerged from its first recession since 2003 in the second quarter as GDP expanded a faster-than-forecast 1.9 percent from the previous quarter.

The International Monetary Fund last week said Brazil and other Latin American economies emerging quickly from the global financial crisis should consider removing fiscal stimulus measures as strong capital inflows put pressure on currencies to appreciate.

Treasury Secretary Arno Augustin yesterday said that the federal government would post a “strong” primary surplus in October, reflecting stronger economic activity and smaller social security payments.

“Tax collection will increase on faster economic activity,” Altamir Lopes, head of the central bank’s economic department, told reporters today in Brasilia.

The real fell 0.8 percent to 1.7462 per dollar at 11:58 a.m. New York time from 1.7328 yesterday.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net

Last Updated: October 30, 2009 12:05 EDT