Brazil May Delay State Debt Bill on Fiscal Discipline Concerns

Brazil’s government wants to delay approval of a bill easing terms on state and municipal debt because of concern it could undermine perceptions of fiscal discipline, Finance Minister Guido Mantega said yesterday.

Mantega said the bill, which still requires Senate approval, could be interpreted as the government encouraging increased spending by states and municipalities. “Given that possible interpretation, the government prefers it to be approved at a later opportunity,” the finance minister said to reporters in Brasilia.

Brazil in September posted the largest budget deficit since 2009 as slower economic growth and tax breaks eroded revenue, reinforcing investor concern the country’s credit rating could be downgraded. President Dilma Rousseff said Nov. 19 she signed a pact with party leaders in which they agreed not to support legislation that would lead to increased public spending or reduced revenue.

The government “avoided bringing on more fiscal strain but they haven’t addressed the existing problems,” said Jankiel Santos, chief strategist at Banco Espirito Santo de Investimentos, by phone from Sao Paulo. “This more rigorous fiscal rhetoric isn’t reflected by their actions.”

Santos cited as a risk to fiscal discipline legislation approved yesterday in Congress that lifts the requirement for the federal government to make up state and municipal shortfalls in meeting their primary budget surplus target.

The debt bill that Mantega said he wants to delay was approved by the lower house of Congress on Oct. 23. It writes down the debt that states and municipalities owe the federal government and reduces the rate of interest charged.

Brazil’s budget surplus excluding interest payments in the 12 months through September narrowed to 1.6 percent of gross domestic product from 2.3 percent a year earlier.

Standard & Poor’s put Brazil’s rating, the second-lowest investment grade, on negative outlook in June, citing slow economic growth and expansive fiscal policy.

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