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Brazil Posts First Primary Deficit in Nearly Three Years

Dec. 28 (Bloomberg) -- Brazil in November posted its first budget deficit before interest payments in almost three years, as government spending continues to rise faster than tax collection in the world’s second-biggest emerging market.

Federal and local governments, including state companies, had a primary deficit in November of 5.5 billion reais ($2.7 billion), compared with a surplus of 12.4 billion reais a month earlier, the central bank said in a report today in Brasilia. The lowest estimate from 13 analysts surveyed by Bloomberg was for a 2.2 billion reais surplus, and the median estimate was for a 5.5 billion reais surplus. The primary deficit was the first since March, 2010.

After interest payments, the budget had a deficit of 21.8 billion reais.

“It has been a difficult year in fiscal terms,” Tulio Maciel, head of the central bank’s economic research department, told reporters in Brasilia. “The level of economic activity affected tax revenues and expenditures.”

Brazil’s tax receipts in November grew 4 percent from a year ago, while expenditures jumped 15 percent during the same period, Maciel said.

Tax Breaks

Brazilian authorities have expanded tax breaks for companies and consumers while boosting government spending, as Brazil posts the slowest growth this year among major emerging markets. Government officials will further reduce taxes to strengthen the economy next year, President Dilma Rousseff said on Dec. 19.

Still, higher spending may fuel inflation, which accelerated to 5.78 percent through mid-December and is forecast by economists to remain above the central bank’s 4.5 percent target for the third straight year.

The primary surplus in the first 11 months of the year reached 82.7 billion reais, the central bank said. The government targets a surplus of 139.8 billion reais for 2012, about 3.1 percent of gross domestic product.

Finance Minister Guido Mantega said last month that the government will include 25.6 billion reais in infrastructure spending to meet its 2012 primary surplus target after tax income dropped. Maciel said today the amount could vary between 25.6 billion reais and 40.2 billion reais.

Faster Growth

Stronger growth will allow Brazil to meet its primary surplus goals without adjustments in both 2013 and 2014, the central bank’s director for economic policy, Carlos Hamilton told reporters on Dec. 20. The bank forecasts growth this year of 1 percent. The economy will expand 3 percent to 4 percent in 2013, Mantega said today in an interview broadcast on Globo News TV.

Net debt fell to 35 percent of gross domestic product from 35.2 percent in October, the central bank said.

Brazil’s fiscal health and falling rate of debt to GDP provided the government with an opportunity for a less rigid fiscal policy, said Darwin Dib, chief strategist at CM Capital Markets Asset Management.

“The government isn’t going to pay the price from the point of view of risk aversion,” Dib said by telephone from Sao Paulo. “If you have the opportunity to have bigger expenses without being punished by the market, obviously any government will adopt that position.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, fell one basis point, or 0.01 percentage point, to 7.12 percent at 12:33 p.m. local time. The real fell 0.12 percent to 2.0458 per U.S. dollar.

Brazil’s central government posted a primary deficit, excluding interest payments, of 4.3 billion reais in November, the treasury said earlier today. The central government’s deficit comes after a 9.9 billion reais surplus in October and compares with a median forecast of a 2.1 billion reais surplus from 13 economists surveyed by Bloomberg.

To contact the reporter on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net.

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net.

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