Brazil’s Meirelles Says Economy Worse Off Than He Imagined

  • Temer government in better position to approve reforms
  • Markets await new government forecast for 2016 budget deficit

Brazil’s Finance Minister Henrique Meirelles said the economy is in worse shape than he anticipated when joining the government one week ago.

"In the numbers I see a worse situation than I expected," he said in an interview in Brasilia, referring in large part to the federal budget.

Yet the current administration led by Michel Temer is in a better position to win approval of economic measures in Congress than his predecessor, Meirelles said, adding that Brazilians are now more aware that sacrifices must be made before growth can return. "The government changed, as did the willingness of Congress and the capacity of the very government," he said.

Meirelles, 70, has said repeatedly that shoring up fiscal accounts and capping the growth of public debt is a top priority to rebuild confidence in the recession-battered economy. His economic team is developing a proposal to reduce pension payouts, and a government official said earlier this week the administration may sell state assets to raise money.

Signs that Brazil’s budget deficit is worse than originally forecast, coupled with higher-than-expected mid-May inflation, pushed interest-rate swaps higher on Friday. Yields paid on the contract maturing January 2017 rose 2 basis points to 13.69 percent at 11:55 am local time.

Temer’s cabinet also is trying to renegotiate state debt before the Supreme Court reaches a decision on how local governments should pay interest to the federal administration. A pending court ruling to allow states to pay simple rather than compound interest rates would deprive the federal government of an estimated 402 billion reais ($113 billion), according to some estimates.

Temer took the country’s reins last week after the Senate temporarily removed Dilma Rousseff from office to face an impeachment trial. He asked Meirelles, a former central bank president renowned for taming inflation, to put back on track an economy that lost its investment-grade status last year amid a near-record budget deficit.

Meirelles’s team will unveil its 2016 budget goal on Monday, which is expected to show it posting a deficit before payments on interest, rather than a surplus as targeted by the previous administration. Senator Cassio Cunha Lima, a government ally, said Thursday the so-called primary deficit is around 200 billion reais. The administration bets lawmakers will act quickly on its proposals if they understand the true extent of the budget gap.

"Without a doubt, people are expecting results," said Meirelles.

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