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UPDATE 2-Brazil posts second-worst primary budget deficit ever
June 30, 2014 / 1:20 PM / 3 years ago

UPDATE 2-Brazil posts second-worst primary budget deficit ever

(Adds central bank and analyst comments, data and context)

By Alonso Soto

BRASILIA, June 30 (Reuters) - Brazil posted in May its second-widest monthly primary budget deficit ever, a worse-than-expected result that puts at risk the country’s key fiscal and debt servicing goal for the year.

The country’s public sector ran a primary budget deficit of 11.046 billion reais ($5 billion), central bank data showed on Monday, worse than market expectations for a deficit of 9.25 billion reais. It was the widest primary deficit on record after the 20.951 billion reais gap posted in December 2008.

Closely watched by financial markets, the primary budget balance is a key gauge of the country’s creditworthiness. It measures how much government revenue can be earmarked to meet interest payments on the debt.

A negative primary balance means that, strictly speaking in conceptual terms, there was insufficient revenue in May to meet all expenditures, including interest obligations.

However, debt payments are made with annual fiscal accounts in mind.

For 2014, Brazil’s public sector targets a primary budget surplus of 1.9 percent of the gross domestic product - but the latest data from May stirred doubts that threshold could be reached.

“It will be very difficult for the government to meet the 1.9 percent of GDP fiscal target in 2014 unless it is able to count on significant extraordinary non-recurrent revenue,” Alberto Ramos, senior economist with Goldman Sachs, said in a research note.

Failure by President Dilma Rousseff to meet Brazil’s primary budget goal could not only keep pressure on already-high inflation, but also hurt business confidence, which is considered one of the main reasons for Brazil’s subpar economic growth over the past three years.

In the first five months of 2014, the government has been able to meet 32 percent of its primary surplus target for the whole year. The government pledged to save at least 99 billion reais this year in primary surplus, or 1.9 percent of the country’s GDP.

Still, central bank head of economic research Tulio Maciel told reporters it was too early to know whether the government would be able to meet its target.

He argued that May’s deficit was due to an increase in public investment and a drop in revenues. He said revenue could get a boost in coming months from dividends of state-run companies.

Brazil had a primary surplus of 16.896 billion reais in April due to concession bonuses and state company dividends. The primary budget represents the public sector’s revenue over expenditures before debt interest payments.

Waldemir Quadros, a professor with the Pontifical Catholic University of Sao Paulo, said he fears the government may again resort to alternative accounting methods or obscure operations to meet the target.

In 2012, the government was criticized for last-minute transfers from a sovereign fund to boost its accounts before the end of the year.

In a controversial decision, the administration last week gave the green light to the sale of billions of dollars worth of offshore oil rights to state-run oil company Petrobras . Rating agencies warned the sale will likely strain the company’s finances.

The government will get about 2 billion reais from the sale this year alone.

Brazil’s public finances have deteriorated rapidly under Rousseff after she gave tax breaks to dozens of industries in an attempt to restart the country’s stagnant economy.

Although the country’s net debt is small compared to other major economies, it is no longer declining as it was in the past decade. The country’s net debt as percentage of GDP climbed to 34.6 percent in May, the highest since October of last year. (Additional reporting by Patricia Duarte and Silvio Cascionem Editing by Walter Brandimarte, Chizu Nomiyama and W Simon)

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