Brazil March Budget Gap Unexpectedly Widens on Interest Outlays

Brazil’s budget deficit in March unexpectedly widened, as interest payments rose to a record in Latin America’s largest economy. Swap rates rose.

The nominal budget gap in March widened to 69.2 billion reais ($23.1 billion) from 58.6 billion reais a month earlier, the central bank said in a report released on Thursday. That was a bigger deficit than estimated by all 6 economists surveyed by Bloomberg, whose median forecast was for a gap of 35.1 billion reais.

The primary surplus in the same month was 0.2 billion reais, below the median forecast of a 5 billion-reais surplus from 17 economists surveyed by Bloomberg. The primary deficit as a percentage of gross domestic product in 12 months was 0.7 percent, the biggest 12-month gap ever.

As Finance Minister Joaquim Levy works to build support in Congress for tax increases and spending cuts, the government has yet to announce how large a spending freeze it will impose on the budget. A slowing economy that reduces tax revenue complicates the effort to deliver the promised primary surplus of 1.2 percent of GDP and stave off a credit downgrade.

Swap rates on the contract due in January 2017, the most traded in Sao Paulo today, rose 16 basis points, or 0.16 percentage point, to 13.38 percent at 10:58 local time. The real weakened 1 percent to 2.9918 per U.S. dollar.

Divided Congress

Levy, who joined President Dilma Rousseff’s administration in January, is trying to persuade a divided Congress to approve the belt-tightening measures. He told lawmakers Wednesday that the threat of a downgrade would “return fast” if the country fails to shrink its budget deficit. In 2014 Brazil had the largest primary deficit on record, 0.6 percent of gross domestic product.

While Standard & Poor’s in March reaffirmed the country’s investment-grade rating in a vote of confidence for the proposed measures, Fitch Ratings and Moody’s Investors Services have cut the outlook to negative from neutral.

As they strive to improve fiscal discipline, the economic team faces a combination of above-target inflation and flagging growth that shrinks tax revenue. Economists surveyed by the central bank forecast GDP will shrink 1.1 percent this year, with consumer prices rising 8.25 percent. To combat inflation, policy makers have boosted the benchmark rate for five straight meetings, including a 50 basis-point rise Wednesday to 13.25 percent.

The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

Interest payments in March totaled 69.5 billion reais, the most since the series began in 2001.

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