Brazil Central Government Posts First Year-End Primary Deficit

Brazil’s central government posted its first year-end primary budget deficit on record after President Dilma Rousseff cut taxes and boosted spending in a failed attempt to revive growth.

The budget, which excludes interest payments as well as municipalities, states and government-run companies, recorded a deficit of 17.2 billion reais ($6.6 billion) in 2014, the first since the Treasury started its series in 1997. Latin America’s largest economy posted a primary surplus of 1 billion reais in December, smaller than every forecast from 16 economists surveyed by Bloomberg, whose median estimate was for a surplus of 9 billion reais.

Rousseff’s administration is raising taxes and cutting spending to narrow the deficit that is threatening the government’s investment grade status. She said Tuesday that Brazil had to “re-balance” its budget in order to restore growth. The government set a primary surplus deficit target of 1.2 percent of gross domestic product this year.

Swap rates on the contract due in January 2016, the most traded in Sao Paulo today, fell three basis points, or 0.03 percentage point, to 12.65 percent at 10:23 a.m. local time. The real weakened 0.94 percent to 2.6009 per U.S. dollar.

Credit Rating

Standard & Poor’s in March last year downgraded Brazil’s credit rating to one level above junk, citing a slowdown in economic growth and deteriorating fiscal accounts. Moody’s Investors Service in September lowered the outlook on its Baa2 rating to negative. That is the second-lowest investment grade.

Rousseff’s government in December started an austerity program by reducing unemployment benefit costs and some pensions, capping the amount it can spend monthly and raising taxes on fuel, imports, personal loans and cosmetics.

Rousseff said this week that the government implemented a fiscal policy last year to ease the impact of the global crisis on jobs and income. She said that those measures reached their limits and a re-balancing of fiscal accounts has become necessary.

Latin America’s largest economy grew 0.1 percent in the third quarter over the three previous months, after contracting 0.6 percent in the second quarter. The result pulled Brazil from the recession it entered in the first half of the year. Economists in central bank’s weekly central bank survey forecast growth of 0.13 this year.

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