Caviar Denial Signals Growing Angst Over Deficit: Brazil Credit

Brazil’s soaring budget deficit is sparking a selloff in its two-week-old international bonds, pushing up the cost of insuring its debt by the most in the world and prompting Finance Minister Guido Mantega to explain that he doesn’t spend taxpayer money on caviar and shrimp meals.

The country’s $3.25 billion of bonds due 2025 have 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 0.23 percentage point in the same span. Brazil’s credit-default swaps have jumped 11 percent in the past month, the most among 73 countries, according to data compiled by CMA Ltd.

Investors are becoming more concerned Brazil will suffer its first credit downgrade in a decade after the nation posted the biggest revenue shortfall in four years Oct. 31, the latest sign fiscal accounts in Latin America’s biggest economy are deteriorating. Standard & Poor’s placed Brazil’s BBB rating on negative outlook in June, citing surging debt and sluggish growth.

“The concern of a downgrade is much more evident because of fiscal slippage,” Siobhan Morden, the head of Latin America strategy at Jefferies Group LLC in New York, said in a telephone interview. “The government isn’t in control of fiscal accounts. It’s difficult to restore confidence in fiscal management when there is inconsistency on all policy and data shows consistent fiscal deterioration.”

Spending Scrutiny

The scrutiny of public spending even led to questioning of Mantega’s meals this week after Contas Abertas, a non-governmental group that monitors fiscal accounts, disclosed Nov. 4 the menu options offered on official flights. The ministry responded with a statement saying Mantega has never chosen the caviar and that he pays for his meals when he does eat on the flights.

A ministry press official declined to comment further.

The declines in Brazilian markets deepened after the government reported last week a deficit of 10.5 billion reais ($4.6 billion) in September, exceeding the 500 million real deficit forecast by 17 economists in a survey by Bloomberg.

As a percentage of gross domestic product, the deficit increased to 3.3 percent in the 12 months ended September, the largest since 2009. The primary surplus, which excludes interest payments, shrank to 1.6 percent, short of the government’s 2.3 percent target.

‘Full Control’

“The government has full control of the fiscal situation,” Mantega told reporters in Brasilia yesterday. “We just had a more difficult year, because economic activity is recovering.”

Analysts in a weekly central bank survey have cut their economic growth forecast for 2013 to 2.5 percent from 3.26 percent at the start of the year.

Annual inflation slowed to 5.84 percent in October from 5.86 percent the previous month, a government report showed today. The rate remains more than one percentage point above the country’s 4.5 percent target.

“Markets are kind of skeptical of the way they’re meeting the fiscal target,” Eduardo Suarez, a Latin America strategist at Bank of Nova Scotia, said in a telephone interview from Toronto. “People want to see concrete plans to meet fiscal targets.”

BNDES Spending

To shore up finances, Mantega said on Nov. 1 that state development bank BNDES will reduce lending 20 percent next year. Government-controlled banks have boosted lending at five times the pace of privately run counterparts this year as part of an effort to revive economic growth. The government also said it will unwind tax breaks on consumer goods.

Mantega said he’s reviewing all spending and is looking into an increase in outlays on unemployment benefits, which may reach 47 billion reais this year, or about 1 percent of GDP.

Moody’s Investors Service lowered its outlook on Brazil’s rating to stable from positive last month, citing state-bank lending and rising debt levels. Brazil’s public debt-to-GDP ratio of 59 percent compares with a median of 45 percent for other nations that share its Baa2 rating, the second-lowest investment grade. S&P rates Brazil an equivalent BBB.

Moody’s officials declined to comment on the growing deficit. A S&P press official didn’t return requests seeking comment.

Default-swap contracts that protect holders of Brazil’s debt against non-payment for five years have risen 20 basis points, or 0.20 percentage point, in the past month.

The real has dropped 3 percent in the past week, the most among major Latin American currencies tracked by Bloomberg. It fell 0.9 percent to 2.3093 per dollar at 5:06 p.m. in Sao Paulo.

Government Wherewithal

Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin America economist, said the central bank’s $376 billion of foreign reserves mean the government has the wherewithal to weather the slump in its currency.

“It’s not like this story is going to end up in tears,” Ramos said in a telephone interview. “They have talked the talk. Now they have to walk the walk.”

Brazilian assets are at risk of further declines if the U.S. begins to scale back stimulus, prompting investors to pull out of emerging markets, according to Alejandro Urbina, who helps oversee $800 million in assets at Silva Capital Management in Chicago.

“Brazil is seen as a weak story in emerging markets,” Urbina said in an e-mailed response to questions. “After having strong fundamentals in the past, now it’s showing signs of weakness. It’s becoming an easier credit to sell compared with others.”

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