Brazil to Review Budget Targets as Weak Economy Erodes Revenue

When Brazil revises its 2015 budget estimates Wednesday afternoon, the question investors will be asking is how much more spending can be cut without deepening an economic recession.

Tax revenue has dropped below government estimates this year as the economy slows amid austerity measures designed to mend the worst budget deficit on record, and rate increases intended to curb above-target inflation. With Finance Minister Joaquim Levy’s budget target looking increasingly unattainable, speculation has grown that the government will lower the goal.

“Everyone knows the budget situation is bad, so we need a more realistic, transparent target,” said Luciano Rostagno, chief economist at Mizuho Bank’s Brazil subsidiary. “Cutting investments and raising taxes would be bad for recovery -- what’s needed is a downsizing of the state, a reduction in ministries and discretionary posts.”

The government currently targets a primary surplus, which excludes interest payments, of 66.3 billion reais ($20.6 billion), or 1.1 percent of gross domestic product. In May the 12-month deficit had widened to 0.7 percent of GDP from 0.6 percent in December.

Levy said Tuesday the government is considering a reduction of the target and additional budget cuts. He and Budget Minister Nelson Barbosa are scheduled to hold a press conference at 5 p.m. local time to discuss the bi-monthly budget review.

Stocks Fall

A report in Folha de S.Paulo newspaper on Wednesday saying that President Dilma Rousseff decided to cut the primary budget surplus goal helped trigger the worst slide in the Americas for the Ibovespa. The Sao Paulo stock exchange later pared some of its losses and traded 1 percent lower at 12:50 p.m.

A primary budget surplus target of about 0.15 percent of GDP, which some newspapers have reported the government will adopt, would increase the odds that Moody’s Investors Service not only downgrades the country’s credit rating but also keeps its outlook negative, said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management Plc.

Analysts surveyed by the central bank forecast that Latin America’s largest economy will shrink by 1.7 percent this year, the worst recession in 25 years, as unemployment and family indebtedness rise.

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