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Brazil’s Smaller Budget Surplus Complicates Inflation Fight

Brazil’s budget surplus before interest payments narrowed in August to its lowest in nine months, making it harder for the central bank, which is relying on tighter fiscal policy, to hit its inflation targets.

The primary surplus, which includes federal and local governments as well as state companies, fell to 4.6 billion reais ($2.5 billion) from 13.8 billion reais in July, the central bank said in a statement distributed today in Brasilia. The figure was lower than the median estimate of 5.1 billion reais from 12 economists surveyed by Bloomberg.

Central bank president Alexandre Tombini has said the government needs to “hold the line” on fiscal policy to help curb the fastest inflation in six years. The central bank’s 2012 inflation forecasts are based on “optimistic” assumptions about the budget, which will mean faster inflation if they fall short, said Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo.

Higher pension payments tied to a planned 14 percent increase in the minimum wage next year, along with spending on the 2014 World Cup and the 2016 Olympic Games, and tax revenue hit by slower growth, make it unlikely that the government will hit its primary budget surplus target next year, Serrano said, speaking by phone from Sao Paulo.

‘Sound Performance’

“We are reaching our primary surplus target this year, but based on very sound performance of tax collection,” Serrano said. “It’s hard to believe that they will deliver a strong fiscal performance next year.”

President Dilma Rousseff’s 2012 budget proposal, presented to congress last month, targets a budget surplus before interest payments of 139.8 billion reais for the federal, state and local governments, the equivalent of 3.1 percent of gross domestic product.

Every 0.5 percentage points that the government falls short of its fiscal target adds 0.2 percentage points to inflation, Serrano said.

Enestor Dos Santos, senior Brazil economist for BBVA in Madrid, said in an e-mailed report that he expects a 2.7 percent primary surplus next year, short of the 3.1 percent target.

After interest payments, the budget deficit widened in August to its highest level in 17 months, as faster inflation and five straight interest rate increases in the year through July triggered higher payments on the country’s debt.

The deficit of 17.1 billion reais was the highest since March 2010, and up from 10.7 billion in August last year.

Deficit Forecast

The central bank cut its forecast for the 2011 budget deficit to 2.4 percent of gross domestic product, from an earlier forecast of 2.5 percent, Tulio Maciel, head of the bank’s economic research department, told reporters in Brasilia.

Brazil’s net debt will end the year at 38.5 percent of GDP, from an earlier forecast of 39 percent, Maciel said. The net debt to GDP ratio will fall to 37.6 percent in September, from 39.2 percent in August, partly helped by a weaker real, which increases the value of Brazil’s dollar assets in local currency, Maciel added.

Tombini raised Brazil’s benchmark interest rate five times this year before cutting it a half point to 12 percent on Aug. 31 even as annual inflation through mid-September ran at 7.33 percent, the fastest in six years. The central bank has repeatedly pledged to slow inflation to the 4.5 midpoint of its target by the end of next year. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.

Budget Deficit

The yield on the interest rate futures contract maturing in January 2013 fell seven basis points, or 0.07 percentage point, to 10.40 percent at 12.59 p.m. New York time. The real declined 1.1 percent to 1.8600 per dollar.

The federal government may receive less money from oil exploration as Congress redefines its rules for distributing royalties. The federal government will reduce its income from oil royalties and a tax on highly productive fields by 1.8 billion reais to help reach an accord on how to share the royalties with non-producing states, O Estado de S. Paulo reported on Sept. 28, without saying where it got the information.

Brazil’s economic growth slowed last quarter to 3.2 percent from a year earlier, down from 4.2 percent in the first quarter and 7.5 percent last year, the fastest pace in two decades.

Even as the global slowdown hits Brazil’s industrial sector, which shrank in July from a year earlier, the country’s job market hasn’t weakened and rising incomes may keep bolstering tax collection. Brazil’s unemployment rate was unchanged in August at 6 percent, a record low for the month.

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