Brazil Targets Moderate Improvement in 2017 Budget Deficit

Updated on
  • Economic team will target budget gap of $41 billion next year
  • The 2017 budget goal is ‘extremely realistic’ -- Meirelles

Brazil’s new economic team announced plans on Thursday to narrow but not close its budget deficit next year, as the worst recession in decades stymies efforts to shore up fiscal accounts.

The government will target a 2017 budget gap before interest payments of 139 billion reais ($41 billion), Finance Minister Henrique Meirelles said, putting to rest weeks of speculation about his plans for next year. That’s equal to 2 percent of gross domestic product, Interim Budget Minister Dyogo De Oliveira said. Local media speculated the so-called primary deficit target, which doesn’t include state budgets, would be around 150 billion reais.

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"The number announced today is extremely realistic, and we can achieve it," Meirelles said. "This is the result of an enormous effort to contain expenditures and raise revenue."

The 2017 goal compares with this year’s target to post a primary deficit no wider than 170.5 billion reais, he said, adding that the economy will return to growth next year and tax revenue will increase. The government also will raise money through asset sales, though it hasn’t decided whether tax hikes will be needed, he said.

The 2017 target is a "positive sign," especially after media reports increased speculation among investors that the number wouldn’t be much of an improvement over this year’s goal, said Zeina Latif, chief economist at brokerage XP Investimentos CCTVM SA.

The Brazilian real rallied 2.1 percent to 3.30 per dollar on the new budget target.

Fiscal Health

The government must ask Congress every year to approve its primary budget goal. If it ends up missing that target, it is in violation of the budget law and has to justify why it fell short. Credit-rating companies and bond traders also use Brazil’s primary budget result to gauge the country’s fiscal health and its ability to service debt. Brazil last reported an annual primary surplus in 2013.

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Investors are closely watching for signs that Acting President Michel Temer will take tough decisions to rein in government spending this year, after Brazil lost its investment-grade status under his predecessor Dilma Rousseff. Temer in May revised the 2016 budget deficit target that Rousseff had set at 96 billion reais, saying the fiscal situation he inherited was worse than expected.

Temer has already made some efforts to improve fiscal austerity. His economic team last month sent Congress a proposed constitutional amendment that would cap growth in public expenditures. He also cut the number of federal ministries, and pledged to fire thousands of government workers.

Meirelles said the government’s belt-tightening eventually will pay off. "Given the favorable outlook on public spending rates, and the subsequent increase in confidence and growth, I believe it’s extremely likely we can report to the country a surplus in 2019," he said.