Levy Cautions of Brazil Downgrade If Budget Cuts Falter

Brazil’s Finance Minister Joaquim Levy cautioned lawmakers on Wednesday that the risk of a credit rating downgrade would increase if the country fails to reduce its budget deficit.

“I will tell you a secret: spending hasn’t fallen, so we need to be careful,” Levy told a joint committee in the lower house of Congress. “If we don’t achieve the fiscal adjustment, the risk of a downgrade will return, and return fast.”

Levy’s comments come after the central government posted smaller budget savings for March than economists forecast and as Congress begins voting on proposals to cut social security benefits. Measures to reduce spending and increase taxes are part of the government’s efforts to achieve a primary budget surplus target, which excludes interest payments, of 1.2 percent of gross domestic product.

The central government’s primary budget surplus reached 1.5 billion reais ($511 million), compared with a median estimate for a 3.2 billion-reais surplus in a Bloomberg survey of 17 economists. The budget does not include states, municipalities and government-run companies.

In the first three months of the year, the central government posted a primary surplus of 4.5 billion reais, compared with a full-year target of 55.3 billion reais.

More Difficult

Levy’s task has become more difficult because of an economic downturn that has eroded tax income. Analysts surveyed by the central bank expect gross domestic product to contract 1.1 percent this year and annual inflation to accelerate to 8.25 percent. The bank targets annual inflation at 4.5 percent, plus or minus two percentage points.

“Brazil is closer to speculative bonds than investment grade,” Levy told legislators. The risk of losing investment grade “has fallen but didn’t disappear entirely,” he said.

Brazil’s Finance Ministry has proposed freezing 77 billion reais in this year’s budget, according to a government official with knowledge of the discussions.

A joint committee in Congress on Wednesday approved a government proposal to restrict labor benefits, including unemployment insurance and wage bonuses. The bill, which had some of its cost-saving measures watered down, has yet to be voted on the floor in both houses.

Fitch Ratings this month cut its outlook on Brazil’s credit rating to negative, citing challenges in strengthening government coffers amid a stalled economy. Brazil’s fiscal accounts have “markedly” deteriorated amid low growth rates and elevated inflation, according to Fitch, which kept the country at BBB, the second-lowest investment grade.

Before it's here, it's on the Bloomberg Terminal.