Levy Bows to Reality as Brazil Economic Slump Drains Savings

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Levy's Challenge
Brazil's Finance Minister Joaquim Levy plans to reverse last year's primary deficit in 2015. The primary budget result excludes payments on interest.

Finance Minister Joaquim Levy’s proposal to reduce Brazil’s budget savings reflects the hard reality that a contracting economy has forced the government to scale back its ambitions for fiscal retrenchment.

Levy said he is targeting a fiscal surplus that excludes interest payments equal to 0.15 percent of gross domestic product this year, a sharp reduction from his original aim of 1.1 percent. He will freeze an additional 8.6 billion reais ($2.7 billion) in spending to meet the new target.

“The objective is to reduce uncertainty in the economy by announcing the target we consider achievable, adequate, certain, given the scenario we currently face,” the minister, nicknamed Scissorhands for his propensity to cut expenditures, told reporters.

Levy is struggling to shrink spending and boost revenue. Lawmakers are rebelling against fiscal-austerity measures amid rising unemployment and the president’s falling popularity. And with just over six months on the job, the minister runs the risk of losing Brazil’s hard-earned investment-grade status on his watch.

“If the current trend worsens, then they’ll go below investment grade” in 2016, Kathryn Rooney Vera, macroeconomic strategist at Bulltick Capital Markets, said by telephone. “Anywhere you look this is an increasingly ugly story.”

Real Depreciation

Levy also proposed reducing the 2016 primary surplus target to 0.7 percent of GDP, from 2 percent previously. The target will now reach the latter level by 2018, he said.

BNP Paribas is now questioning whether Brazil will deliver any primary budget surplus this year, Marcelo Carvalho, chief economist for Latin America, wrote in a note Thursday.

Brazil’s benchmark stock index dropped and the real declined the most among emerging-market currencies Wednesday after press reports anticipated Levy’s announcement, which he made after markets closed. The real lost an additional 1.7 percent Thursday as of 9:42 a.m. local time, slipping to 3.2783 per dollar.

Standard & Poor’s in March last year cut Brazil’s credit rating to one level above junk. Moody’s Investors Service followed six months later by lowering its outlook on the Baa2 rating to negative. That is the second-lowest investment grade.

Both ratings companies said deteriorating fiscal accounts and faltering growth motivated their decisions. Since then, Brazil’s fortunes have worsened. The 12-month deficit before payments on interest widened to 0.7 percent of GDP in May, while the Budget Ministry on Wednesday said the economy will contract 1.49 percent in 2015 -- more than previously forecast.

Record Low

The downturn has driven President Dilma Rousseff’s approval rating to a record low, making it increasingly difficult to impose austerity bills in Congress. Lawmakers went on recess last week without voting on legislation that would raise revenue by creating incentives for Brazilians to pay a tax and repatriate money. The Senate delayed voting on a proposal to boost corporate sales taxes.

Senator Aecio Neves, an opposition leader and the runner-up in last year’s presidential election, took the government to task Wednesday, writing on his Facebook page that changes to the fiscal target reflect its “inability” to fulfill promises.

Reginaldo Galhardo, a foreign-exchange manager at brokerage Treviso Corretora de Cambio in Sao Paulo, was more optimistic about the administration, saying Wednesday’s pledge to cut spending shows a commitment to fiscal discipline.

“That’s a positive point,” he said.

Yet with Wednesday’s announcement, Levy is providing himself with little room to err if he wants to achieve any budget savings this year.

“The target is already quite low, the fiscal effort is progressing quite slowly, but political and institutional support for the adjustment is wavering,” Alberto Ramos, chief Latin America economist for Goldman Sachs Group Inc., said by phone. “The room for slippage is basically non-existent.”

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