UPDATE 3-Brazil tries to lift fiscal credibility, markets don't buy it

Mon Jul 22, 2013 8:21pm EDT

* Brazil government to freeze an extra $4.4 bln in budget

* Finance minister vows to meet fiscal target this year

* Markets sees spending freeze as insufficient

By Alonso Soto

BRASILIA, July 22 (Reuters) - Brazil announced on Monday it will freeze an additional 10 billion reais ($4.4 billion) in budgeted spending, in an effort that is unlikely to dispel investors' mistrust in the government's commitment to fiscal austerity.

The new freeze, which was originally expected to reach up to 20 billion reais, is aimed at helping the central bank battle inflation, which hit a 20-month high in June. Brazil's planning ministry on Monday raised its projection for 2013 inflation to 5.7 percent from 5.2 percent previously -- closer to market expectations.

The government had unveiled a budget freeze of 28 billion reais in May, bringing the total amount for this year to 38 billion reais, below last year's freeze of 55 billion reais.

The widely expected freeze did not convince many analysts that President Dilma Rousseff's government is committed to rein in spending to effectively battle above-target inflation.

"Saying that you will freeze 10 billion reais in spending is not even worth the announcement. It's too timid," said Alberto Ramos, head of Latin America economic research for Goldman Sachs. "The government is trying to instill more credibility on its fiscal stance, but it continues to be insufficient."

The government needs a freeze of about 25 billion reais to meet an already reduced primary budget target of 2.3 percent of its gross domestic products this year, consultancy Rosenberg & Associados said in a note to clients.

After two years of aggressive spending Rousseff is trying to convince investors her administration will stick to the tough fiscal rules that helped stabilize Latin America's largest economy after decades of crises.

The leftist economist faces growing spending pressures after a wave of nationwide demonstrations to demand investments in health, education and other public services rattled the country in June.

Rousseff, who is widely expected to run for re-election next year, has seen her approval rating plummet since the protests, recent polls showed..

"I'm confident we will meet our (fiscal) targets this year," Finance Minister Guido Mantega told reporters, reiterating the government aims for a primary surplus of 2.3 percent of GDP in 2013. "Investors' confidence will be recovering soon."

CLEAR FISCAL POLICY

Originally, the government had set the goal at 3.1 percent of GDP, later cutting the target after revenue fell due to a flurry of tax breaks aimed at sparking economic growth. The primary surplus represents the public sector's excess revenue over expenditures before debt payments.

The new budget freeze includes spending on travel, rent, electricity and the hiring of new public servants.

In rare comments on the country's fiscal strategy, central bank chief Alexandre Tombini told a local newspaper on Sunday the government needs to be clear in its next fiscal policy steps to bolster investors' confidence in an economy showing new signs of weakness.

The administration has relaxed tough fiscal rules in recent years, using "creative accounting" methods to bolster savings results that have been harshly criticized for lack of transparency. The government has brought forward dividends of state-owned companies and transferred cash from other funds to bolster state coffers.

Higher public spending tends to fuel inflation and add to the country's debt burden.

Although Brazil's debt levels are much lower than those of some European countries, its expansionary stance forced the central bank to lift interest rates from record lows and prompted warnings from debt rating agencies.

In June, Standard and Poor's cut Brazil's rating outlook to "negative" from "stable" due to weakening public finances.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.