Brazil Cuts $18.5 Billion From Budget as Downgrade Looms

Brazil will cut 44 billion reais ($18.5 billion) from this year’s budget, as policy makers seek to rein in inflation and shore up fiscal management that has sparked warnings of a rating downgrade. Swap rates fell.

The cuts will allow Brazil to meet a primary surplus target of 1.9 percent of gross domestic product, the Finance Ministry said in a statement distributed in Brasilia today. The budget is based on estimates the economy will grow 2.5 percent this year and inflation will slow to 5.3 percent.

President Dilma Rousseff’s efforts to spark economic growth by increasing public spending led to a wider budget deficit and fueled inflation last year. Rising prices eroded business and consumer confidence, holding back economic growth in the world’s biggest emerging market after China. In June, Standard & Poor’s placed Brazil’s rating on negative outlook.

Brazilian policy makers “are giving themselves an ambitious but achievable goal,” said Daniel Snowden, an emerging-markets analyst at Informa Global Markets, in a telephone interview. “It’s a goal that will probably satisfy ratings agencies.”

Swap rates fell across the board as traders reinforced bets the central bank will halve the pace of interest rate increases next week, as the cut on spending helps rein in consumer prices.

Rate Increase

The contract due in January 2015, the most traded in Sao Paulo today, fell five basis points, or 0.05 percentage point, to 11.08 percent at 1:15 p.m. local time. The real strengthened 1.1 percent to 2.3683 per U.S. dollar.

Policy makers increased the benchmark interest rate by half a percentage point in each of their past six meetings to 10.5 percent. Their next board meeting is scheduled for Feb. 25-26.

The government’s goal is to consolidate public accounts and cut inflation, Finance Minister Guido Mantega told reporters in Brasilia today. “The fiscal policy we’re carrying out helps monetary policy be less severe,” he said.

“The central bank now has very relevant room for reducing their hiking pace,” Roberto Padovani, chief economist at Votorantim Ctvm Ltda, said by phone from Sao Paulo. “We’re changing tools, using more fiscal and less monetary tools, so the bank doesn’t have to hike interest rates that much. It’s a new policy mix.”

Budget Gap

Inflation rates have remained above the central bank’s 4.5 percent target for more than three years, reaching 5.59 percent in the first month of 2014. Consumer prices have prompted central bankers to lift the benchmark Selic by 325 basis points since April.

The government last year shaved 28 billion reais from the budget, as well as 10 billion reais to cover states and cities, while posting a primary surplus of 1.9 percent of GDP. That fell short of its 2.3 percent target, which had been reduced from about 3.1 percent at the start of last year.

Brazil’s budget gap in 2013 reached 157.6 billion reais after widening in December to 13.6 billion reais from 0.2 billion reais a month earlier, the central bank said on Jan. 31. That’s the biggest year-end deficit since the series started in 2002.

The deterioration in fiscal accounts led Moody’s to lower Brazil’s credit outlook to stable from positive. Brazil’s Baa2 rating from Moody’s and equivalent BBB ranking from S&P are the second-lowest investment grades.

Today’s “fiscal target is strong, the market sees the number as convincing,” Reginaldo Galhardo, foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo, said in a phone interview. “The target tends to be well seen by the rating companies. The market will continue to be vigilant on whether the government will meet the target.”

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