Brazil’s June Primary Budget Gap Wider Than All Forecasts

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Brazil’s central government primary budget deficit was wider last month than every analyst forecast, underscoring the challenges that Finance Minister Joaquim Levy faces in staving off a credit downgrade.

The gap, which excludes interest payments as well as states, municipalities and government-run companies, was 8.2 billion reais ($2.4 billion) in June, the biggest this year, Brazil’s Treasury said Thursday. The median estimate of 17 economists surveyed by Bloomberg was for a gap of 3.5 billion reais following a deficit of 8.1 billion reais in May.

Brazil’s worst economic contraction in 25 years is stifling Levy’s efforts to increase tax collection. Standard & Poor’s this week took note and put Brazil on warning, placing its sovereign debt one decision away from junk status by cutting its outlook to negative.

“Revenue fell hard, which is a persistent problem,” Andre Perfeito, chief economist at Sao Paulo-based brokerage Gradual Cctvm SA, said by telephone. “The rating agencies tend to look at that with pessimistic eyes.”

Levy will try to work with Congress next month when it returns from recess to pass additional tax increases. Yet lawmakers are growing increasingly reluctant to cooperate with a government weakened by a mushrooming corruption scandal and shrinking economy.

Policy Falters

Levy last week cut the government’s 2015 fiscal target to

0.15 percent of gross domestic product from 1.1 percent as tax collection has underperformed estimates. For the first six months of this year, the central government primary result has been the worst on record.

As fiscal policy falters, the central bank on Wednesday boosted the benchmark rate for a seventh straight time, to 14.25 percent. The real dropped 1.3 percent to 3.3737 per U.S. dollar at 5:21 p.m. Sao Paulo time on signals the central bank now will halt its tightening cycle. That’s the lowest in about 12 years.

Policy makers have been pushing the so-called Selic rate up to fight inflation that is now more than double the 4.5 percent mid-point of the government’s target range. The central bank has vowed to bring inflation to that level by year-end 2016.