By Leonardo Goy and Alonso Soto
BRASILIA Feb 11 Brazil's electricity regulator
ANEEL on Tuesday proposed a 4.6 percent increase in rates paid
by consumers to help cover power subsidies, a move that could
add pressure to already-high inflation in Latin America's top
ANEEL expects a deficit of 5.6 billion reais ($2.33 billion)
this year in the so-called Energy Development Account, or CDE.
That does not include the cost of using more expensive thermal
energy to make up for a drop in hydroelectric output.
Last year, President Dilma Rousseff made a deal with power
utilities to slash electricity prices in a bid to bolster
Brazil's slow-moving economy and tame a surge in prices.
A year has passed and the economy remains fragile and
inflation high, which has threatened Brazil's investment grade
rating as investors worry about the country's fiscal health.
Finance Minister Guido Mantega has promised to pay for any
extra energy costs to avoid an increase in consumer bills. That
cost, which some media reports say could reach 5 billion reais,
also threatens to derail government efforts to show markets it
is becoming more fiscally responsible.
The government has budgeted 9 billion reais to pay for
energy costs this year. Most of that amount would be loaned to
power distributors to pay for thermal energy as a severe drought
has lowered water reservoir levels at hydroelectric power
Another inflationary risk stemming from the drought is a
potential increase in the price of soy and corn, used to feed
livestock. Producers say yields on recently planted soybeans
could be affected by a month and a half of dry weather in much
But any impact on inflation would be milder than the food
shock felt in late 2012 after a drought in the United States
bolstered the price of global grains, government officials say.
"There is a risk and we are monitoring the situation very
closely, but so far the drought has not had a significant impact
on agriculture," said a government official, who asked not to be
named. "There is no expectation for lack of grains in Brazil."
Most weather forecasters expect rain to return to Brazil's
parched southeast in the second half of February and the
government forecasts a record soybean crop.
Sao Paulo-based agricultural research institute Cepea said
in a report on Tuesday that the hot, dry weather was affecting
tomatoes, potatoes and lettuce crops, possibly raising prices of
those foods for consumers.
Many vegetables are currently being harvested, however,
moderating the impact, Cepea said.
ANEEL's rate hike proposal will be discussed at public
hearings between Feb. 13 and March 16 before a decision. The
subsidies in the CDE cover energy distribution to the remote
northern regions and lower rates for poor consumers.
If the regulator opts to hike rates by 4.6 percent it could
add 0.4 percentage point to this year's inflation, said Flavio
Combat, chief economist with the Concordia brokerage in Rio de
Combat said the rate adjustment would increase his year-end
inflation forecast from 5.9 percent to 6.3 percent, very close
to the official target ceiling of 6.5 percent.
High inflation is a political liability for Rousseff, who is
expected to run for a second term in elections on Oct. 5.
Although annual inflation eased in January to 5.59 percent,
Brazil has struggled to keep prices in check due to a
combination of more public spending, a weaker local currency and