Brazil power failures may trigger fiscal short circuit

BRASILIA Fri Feb 7, 2014 9:58am EST

BRASILIA Feb 7 (Reuters) - Brazil's fiscal accounts, already under close scrutiny by rating agencies, could suffer a new blow this year as the government picks up the bill for rising energy prices.

A blackout in large swathes of the country this week raised serious questions about the capacity of the power system to cope with rising consumption and a drop in supply as low water reservoir levels sap output at hydroelectric plants.

To avoid an embarrassment during the upcoming soccer World Cup and a new spike in inflation, President Dilma Rousseff has vowed to take on the cost of using gas-and-fuel-powered plants to guarantee supply.

Finance Minister Guido Mantega acknowledged on Wednesday the government may have to use more than the 9 billion reais ($3.78 billion) it budgeted to pay for energy costs this year. Most of that amount would be loaned to power distributors to pay for more expensive thermal energy.

Local media has reported that the energy bill could balloon to about 18 billion reais this year, nearly double what the government paid last year.

The finance ministry declined to comment on the matter. Officials have said the government continues to calculate that figure, which will largely depend on whether it rains again soon.

That extra expense could not come at a worse time for the Rousseff administration.

Her government is scrambling to appease rating agencies threatening to downgrade Brazil's debt rating over fears that she is abandoning the prudent fiscal policies that helped the economy stabilize in the last decade.

A downgrade could further rattle financial and real economy investors already worried by the recent sell-off in emerging markets triggered by a slowdown in the Chinese economy and a withdraw of monetary stimulus in the United States.

"An extra 9 billion reais could really hurt the fiscal target," said Mansueto Almeida, an economist with IPEA, a government economic think tank. "The government will either have to resort to accounting tricks or cut investment."

To put the figure in perspective, 9 billion reais is nearly the amount of money that the transportation ministry invested in roads in all of 2013.

Under Rousseff the country's primary surplus, or excess revenue over expenditures before debt payments, has shrunk from 3.11 percent of GDP to 1.9 percent last year. She has also relaxed fiscal rules and used what analysts dubbed "accounting tricks" to bolster the government accounts in 2012.

The risk of more power blackouts could further drag down an economy that remains stuck in a rut, growing on average a meager 1.8 percent per year since Rousseff took office in 2011. Brazil had been growing more than 4 percent a year in the previous decade.

THE LESSER OF TWO EVILS

Allowing power distribution companies to raise energy bills on consumers to pay for more expensive thermal power would ease pressure on state coffers and appease rating agencies worried about the country's finances.

But that would put upward pressure on already high inflation, a big political liability for Rousseff who is expected run for another term in the October general vote.

Her government has decided to take on that costly burden even if it leaves a hole in its fiscal accounts.

Rousseff has said the administration will announce a budget freeze later in February that should keep the country's debt-to-GDP ratio on a declining trend. The new primary target should be around 2 percent of GDP, government official have told Reuters.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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