Brazil’s Temer Outlines First Measures to Tame Budget Gap

  • Acting president proposes spending cap to Congress leaders
  • Approval of new fiscal goal to be first test of political base

Brazil’s Acting President Michel Temer outlined the first economic measures to regain investor confidence, which was shaken by the loss of a key cabinet member just 11 days after he took office.

Temer said on Tuesday he’ll ask Congress to limit subsidies and approve a cap on government spending, as part of an effort to tame a near-record budget deficit in Latin America’s largest economy. He also suggested he could shut down the country’s sovereign wealth fund and improve corporate governance at public pension funds and state-run companies such as Petroleo Brasileiro SA, the epicenter of a corruption scandal that has rocked the country for more than two years.

QuickTake Brazil's Highs and Lows

The announcement comes the day after Planning Minister Romero Juca was forced to step down over allegations he offered to obstruct the corruption probe, known as Carwash. Investor concern about the political fallout of the massive graft investigation has damped enthusiasm for the interim administration that took over during President Dilma Rousseff’s impeachment process.

“God gave me a mission for the brief period of two and a half years to help pull the country out of crisis,” Temer said in a televised speech to congressional leaders. “It’s going to take time, but if we govern together until 2018 and prepare the country for a peaceful election, we will have adequately done our job.”

Test of Support

Temer said a pending congressional vote on his proposal to revise Brazil’s budget goals will be the first test of his political support. He asked Congress on Monday to allow a deficit before interest payments of 170.5 billion reais, saying the fiscal reality is much worse than his predecessor admitted.

Suspended president Rousseff in March asked Congress to allow a primary deficit of as much as 96.7 billion reais, already a stark revision of her prior goal of 24 billion-real surplus for 2016.

Given the size of Brazil’s fiscal hole, the policy guidelines and “impressive” rhetoric are a welcome start, but are sure to run into a more difficult political reality in Congress, Neil Shearing, chief emerging markets economist with Capital economics, said in a report.

“The plans are lofty in ambition, but so far lacking in detail,” Shearing said. “The problem, as ever, remains implementation.”

Structural reforms including a limit on government spending are more important than one-time budget cuts for putting Brazil’s fiscal accounts in order, Finance Minister Henrique Meirelles told reporters after Temer’s speech. The spending ceiling will be adjusted according to inflation from the previous year, and expenditure requirements for health and education will be subject to that limit, helping control government costs as a percentage of GDP, Meirelles said.

Congressional Approval

A constitutional amendment needed to implement the spending cap could be sent to Congress in two weeks, according to Meirelles, and must be approved twice by three fifths of both houses. Members of Temer’s political party say they’re confident they have enough votes even after Juca -- who was spearheading efforts to pass the measures in Congress -- was forced to leave Temer’s cabinet and return to his previous job as senator.

Two of the measures announced on Tuesday -- scrapping the country’s sovereign wealth fund and determining that development bank BNDES pays back its Treasury debts -- could be implemented by executive decision, and both would help reduce the public debt.

The BNDES will pay back 100 billion reais ($28 billion) to the Treasury, 40 billion reais of which as soon as the measure gets legal clearance, with two payments of 30 billion reais to follow, Meirelles said. The government is also considering using an estimated 2 billion reais ($559 million) in Brazil’s sovereign wealth fund to pay off public debt.

“The process of selling assets will be carefully evaluated so as to avoid creating artificial or abrupt moves in asset prices,” Meirelles said in response to a question about Banco do Brasil’s shares, which make up about three quarters of the sovereign wealth fund.

The fund was created by former president Luiz Inacio Lula da Silva to keep the expected windfall from vast deep-sea oil discoveries in the early 2000s, which by law must be operated by Petrobras. Now, with low oil prices and the state-run company strained by years of corruption and mismanagement, Temer said he also supports legislation that
relieves Petrobras of its role as sole operator and mandatory stakeholder in so-called pre-salt oilfields.

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