Brazil will eliminate tax breaks on consumer goods and end a program to stimulate exports to shore up public finances, Treasury Secretary Arno Augustin said.
The budget will be easier to manage next year as tax collection increases, the minimum wage grows at a slower pace and the government reduces capital injections to public banks, Augustin said in an interview yesterday. He said the federal government will meet its goal of saving 73 billion reais ($32 billion) before interest payments this year.
The real declined more than any other major currency since Brazil last month posted its widest budget deficit in almost four years, renewing investors’ concern the nation’s credit rating may be downgraded. Standard & Poor’s placed Brazil’s BBB rating on negative outlook in June, citing surging debt and sluggish growth.
“We are used to dealing with the markets’ complexity and moods,” Augustin said at his office in Brasilia. The government must “react with calm, seek to inform and undo possible misunderstanding and continue with the policies it believes will deal with the negative circumstances.”
The real weakened 0.8 percent to 2.3061 yesterday. The currency has declined 5 percent since the central bank reported on Oct. 31 that the budget deficit widened to 3.3 of gross domestic product in the 12 months ended September, the largest since November 2009.
Swap rates on the contract due in January 2015, the most traded in Sao Paulo yesterday, rose 13 basis points, or 0.13 percentage point, to 10.91 percent. Five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, rose three basis points to 191 basis points.
“It’s normal for the market to be more critical at times,” Augustin said.
Finance Minister Guido Mantega pledged on Nov. 1 to reduce the national state development bank’s loans by about 20 percent next year and rein in other areas of spending to improve fiscal performance. He also said the government will roll back tax breaks on consumer goods created to revive economic growth.
Government-controlled banks have boosted lending at five times the pace of privately run counterparts this year to revive economic growth. The government also will unwind tax breaks on consumer goods.
The primary surplus, which excludes interest payments, shrank to 1.6 percent, short of the government’s 2.3 percent target for this year.
S&P in June placed Brazil’s rating on negative outlook, and Moody’s Investors Service last month reduced its outlook to stable from positive. Moody’s emphasized that Brazil’s 59 percent government debt-to-gross domestic product ratio was above the 45 percent median for other nations whose sovereign bonds have the same rating.
Fitch Ratings is more interested in Brazil’s long-term fiscal trends, Shelly Shetty, head of the company’s Latin America sovereigns, said in an e-mailed response to questions yesterday.
“We have to see to what degree the government is able to meet its primary surplus target for 2013 and its commitment to maintain a primary surplus which is compatible with stability in the general government debt burden,” she wrote.
The country’s $3.25 billion of bonds due 2025 tumbled 3.01 cents since they were issued Oct. 23, increasing yields by 0.35 percentage point to 4.66 percent. Yields on government debt in emerging markets rose an average 0.28 percentage point in the same span.
Demand for the bonds was $10 billion, Augustin said.
“It was a very positive result,” he said about the debt sale. “The economist says that the fundamentals are poor, but the trader at the same bank thinks that the country is doing very well and that he must invest.”
Government spending has helped fuel inflation that has run above the central bank’s 4.5 percent target during President Dilma Rousseff’s entire tenure. Inflation continues to show resistance and on an annual basis will remain elevated, central bank director for economic policy, Carlos Hamilton, told reporters Nov. 6.
Consumer price increases prompted the central bank to boost the benchmark Selic by 50 basis points at each of the past four monetary policy meetings following a quarter-point boost in April. That is 75 basis points more than Indonesia, the only other country among major central banks tracked by Bloomberg that has boosted borrowing costs from last year’s levels.
Even so, annual inflation will accelerate to 5.92 percent by the end of next year from 5.84 percent in October, according to a Nov. 1 central bank survey of about 100 economists. Those analysts also expect growth in Latin America’s largest economy to slow to 2.13 percent next year from 2.50 percent in 2013.
Brazil’s gross domestic product expanded by 0.9 percent in 2012 and 2.7 percent the year prior.