By Alonso Soto and Leonardo Goy
BRASILIA, March 13 Brazil unveiled measures on
Thursday to help electricity distributors struggling with high
power costs caused by drought, a move aimed at combating
inflation by delaying increases in electricity rates until next
The government said it will provide an extra 4 billion reais
($1.7 billion) and allow the country's electricity clearing
house to seek up to 8 billion reais in private financing to
support the distributors. The companies are paying for costly
thermal power to cover a drop in hydroelectricity output.
Gradual electricity rate hikes will be allowed next year,
cushioning the immediate impact of price volatility on consumers
and avoiding inflationary pressures in an election year in which
President Dilma Rousseff will seek a second term.
Policymakers said the new measures will have no impact on
Brazil's fiscal accounts at a time when investors are worried
that its deteriorating finances could lead to a credit rating
Still, some analysts believe the measures are a short-term
fix that may not be enough to contain prices in coming years and
solve recurring problems buffeting Brazil's electricity sector.
"The measures may ease inflation in the short term but
repress inflation in the medium to long term," said Andre
Perfeito, chief economist with Gradual Investimentos in Sao
Paulo. "We need to see how the market reacts tomorrow. Inflation
expectations may not drop."
Brazil's power generation depends mostly on hydroelectric
dams. Low levels in many reservoirs have raised the threat of
energy rationing this year, prompting the government to activate
costlier backup thermal plants.
As part of the measures the government will auction excess
electricity in April to provide distributors with cheaper power.
The surge in energy costs, which started last year, led to
increased government subsidies to the sector, burdening the
finances of a country that has failed to meet its fiscal target
in the last two years.
The government wants to save 1.9 percent of GDP in 2014
before debt interest payments, or 99 billion reais.
The extra energy costs could climb as high as 18 billion
reais ($7.6 billion) in 2014, according to some private
estimates. The government paid about 10 billion reais in energy
subsidies last year during another drought.
Treasury chief Arno Augustin told reporters the 4 billion
reais in subsidies for distributors will be covered by an
extension of a corporate tax settlement program and possible tax
increases this year. He decline to say which taxes would go up.
The announcement came just hours after Finance Minister
Guido Mantega and central bank chief Alexandre Tombini met
separately with Standard & Poor's Corp analysts.
S&P last year placed a negative outlook on its rating for
Brazil, raising fears among investors and Brazilian authorities
that the country's rating could be cut as early as this year.
A downgrade could further erode investor confidence in
Brazil's macroeconomic policies and raise debt costs, making it
tougher for Rousseff to spur economic growth.
A hike in energy rates would have pushed up consumer prices
at a time when the Brazilian central bank is raising borrowing
costs to curb inflation, which for the past few years was in the
upper end of the target range between 2.5 and 6.5 percent.
An increase of 1 percent in electricity fares adds 0.03
percentage points to the IPCA, the country's benchmark consumer
prices index, according to Andre Braz, an economist with
research group Fundação Getulio Vargas, or FGV.
"Inflation will be a key challenge for policymakers this
year. It may easily end the year above 6 percent," said Braz,
who gathers price data for FGV. "We need more clarity from the
government so that the market can better predict inflation and
help monetary policy control inflation expectations."
Brazil's inflation rose 5.68 percent in the 12 months
Uncertainty over government policy and future rainfall sent
investors fleeing from Brazilian electricity stocks.
Shares of distributor Eletropaulo Metropolitana Eletricidade
de Sao Paulo SA fell 37 percent in the past 12
months, while those of Rio de Janeiro-based distributor Light SA
dropped by more than 17 percent. A broader index of
electricity shares Brazil's Bovespa exchange, including
generating firms and distributors, was down 21 percent.
Spot market energy rates shot up to a record 822 reais/MWh
in February due to the drought, pushing many distribution
companies closer to insolvency.