Levy Sees Brazil Political Agreement to Shore Up Fiscal Position

  • Fiscal measures could pave wave to resumed growth in economy
  • Congress likely to approve tax on financial transations

Finance Minister Joaquim Levy said Brazilian politicians are likely to reach some sort of accord, paving the way for Congress to adopt fiscal adjustment measures that will ultimately return Latin America’s largest economy to growth. 

Congress has delayed voting on whether to overturn President Dilma Rousseff’s veto on spending bills, a move that would undermine austerity measures Levy helped shepherd through Congress earlier this year. The measures weren’t enough to stave off a credit rating downgrade to junk and the government is espousing additional levies as it trims its own expenditures to avoid another one.

“I think that ultimately the political problem we see now will be solved; there’s not many options outside of that,” Levy said at an event in Lima on Saturday. “People will not allow us to get on the road that would imply more inflation or disorganization. Very much to the contrary.”

Levy has proposed adopting a tax on financial transactions, known as CPMF, which was unpopular when implemented in the past. He said polls show citizens aren’t so opposed if they understand the tax is part of a package to restore stability and growth, and that he thinks it will pass Congress.

The government is “reducing expenditures, because people are not that tolerant of taxes, but then you have to do whatever it takes to get to a 0.7” percent primary budget surplus, Levy said, referring to the government’s 2016 target. “We have to do that as soon as possible, because the longer it takes, the higher the toll for the economy.”

Brazil entered recession in the second quarter and is on track to two straight years of contraction for the first time in more than eight decades. Latin America’s largest economy ran a primary budget deficit 0.76 percent of GDP in the 12 months through August.

Ratings companies have taken note, with Moody’s Investors Service dropping Brazil’s credit rating to the lowest investment grade in August. Less than a month later, Standard & Poor’s cut the rating to junk. The latter was “a wake-up call,” and there is time to avoid another downgrade, according to central bank president Alexandre Tombini.

“I, as a central banker, don’t like to dance close to the edge,” Tombini said at the same event in Lima. “So we need to do everything we can to avoid this, and I think we have all the means to avoid a downgrade in Brazil from a second credit rating agency.”

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