Bonds News

Brazil to miss spending cap rule by 2% of GDP this year - Citi

BRASILIA, April 20 (Reuters) - Brazil is on track to breach its key ‘spending cap’ rule by 2% of gross domestic product this year, economists at Citi warned on Tuesday, predicting that the government will significantly ease fiscal policy to tackle the COVID-19 pandemic.

The ceiling limits growth in public spending to the previous year’s rate of inflation and is widely seen as the government’s most important fiscal rule, anchoring confidence in its long-term commitment to reducing the debt and deficit.

Government officials have insisted the cap will not be broken. But investor worries that the cap will break have driven risk premiums in Brazilian assets sharply higher, resulting in a steep yield curve and weak exchange rate.

In a note titled ‘Brace yourself, further fiscal easing is coming’, economists at Citi said they now expect the government to breach the cap by 158 billion reais ($28.5 bln), equivalent to 2% of GDP. Their previous forecast was for a 1% of GDP breach.

That will mostly be made up of 71 billion reais of ‘non-recurring extra-spending cap measures’ like emergency cash transfers and vaccinations, and 62 billion reais of aid for states, job protection schemes and credit programs.

“The COVID-19 situation escalated considerably, increasing the pressure to extend COVID-19-related fiscal measures. The government should do very soon, and we are thus revising our long-standing worse-than-consensus fiscal scenario,” they said.

This extra spending is likely to be funded by the government approving ‘extraordinary credits’ or establishing a more open-ended ‘state of calamity’, Citi economists said.

The government’s revised federal budget proposals were approved by Congress late on Monday and now await President Jair Bolsonaro’s signature to come into law. (Reporting by Jamie McGeever; Editing by Kirsten Donovan)