Brazil Budget Gap in February Smaller Than Economists Forecast

Brazil’s budget deficit in February was smaller than economists estimated, after Standard & Poor’s this week lowered the country’s credit rating.

The budget gap in February narrowed to 9.5 billion reais ($4.2 billion) from 10.5 billion reais a month earlier. The median forecast from three analysts surveyed by Bloomberg was for a shortfall of 24.2 billion reais. The primary surplus in the same month was 2.1 billion reais, above the median forecast of a 0.4 billion reais deficit from 11 economists.

President Dilma Rousseff is struggling to convince investors that her government will show fiscal constraint this year after Brazil posted the biggest deficit on record in 2013. Officials in February announced billions in public spending cuts in efforts to both reduce debt and slow above-target inflation.

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, fell one basis point, or 0.01 percentage point, to 11.13 percent at 10:48 a.m. local time. The real strengthened 0.1 percent to 2.2557 against the U.S. dollar.

S&P on March 24 cut the country’s credit one step to BBB-, its lowest investment-grade rating, with a stable outlook, citing slow growth and deteriorating fiscal performance. Efforts to fuel growth through increased spending and tame prices through higher interest rates have damaged accounts, S&P said. It was Brazil’s first downgrade in a decade.

Budget Cut

Brazil will cut 44 billion reais from this year’s budget and aim for a 1.9 percent primary surplus target, the Finance Ministry said in a Feb. 20 statement. The primary surplus as a percentage of gross domestic product in the year through February was 1.76 percent, the central bank report said today.

Brazil’s budget gap in 2013 reached 157.6 billion reais, the biggest year-end deficit since the series started in 2002. The primary surplus before interest payments was 1.9 percent of gross domestic product last year, below the government’s 2.3 percent target.

Brazil’s central bank said inflation will accelerate to 6.2 percent this year if policy makers raise the key rate by 25 basis points to 11 percent, according to the quarterly inflation report published March 27. Annual inflation through mid-March was 5.9 percent.

Policy makers have lifted the key rate by 350 basis points since April as inflation persists above the 4.5 percent midpoint of the central bank’s target range. That’s the biggest increase in the world behind Turkey.

Growth in Latin America’s largest economy will slow to 2 percent this year from 2.3 percent in 2013, according to the central bank.

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