Brazil & Southern Cone - July 2013 (ISSN 1741-4431)

The ratings agency Standard & Poor’s (S&P) has warned that it might consider downgrading Brazil’s credit rating if the government decides to implement a massive public spending programme at a time when its fiscal performance is faltering.

With the government led by President Dilma Rousseff making a host of investment promises in response to the latest public protests, and the publicly discredited congress falling over itself to show willing, there is a big question as to how to fund all these promises. Three new bills on transport, health and education dashed through congress in response to the protests will cost the federal government R$115bn (US$52.8bn) a year alone if approved, the business daily Valor estimated.

S&P, which on 6 June lowered its outlook on Brazil’s "BBB" investment grade rating to negative, issued its latest comment on 2 July. Sebastian Briozzo, S&P’s lead analyst for Brazil, stressed a further downgrade could come “if there is a greater sense of intervention in the public sector, which will increase debt levels.” “There is very limited room to maneuver [sic] on the fiscal side,” he noted.

Briozzo said S&P had revised Brazil’s outlook to negative on “some signs of potential use of fiscal policy in a way that is not consistent with the current rating.” He stressed that S&P does not see any governability issues arising from the recent protests. Indeed, as a result it expects a stronger emphasis on structural reforms, but it’s concerned about the cost of meeting the protesters’ demands for better public services. “Before these events happened, the strategy was that private investment had to take the lead, but there was no sense of urgency…These demonstrations have shaken the status quo, and there could be a new sense of urgency. How it translates into action, we’ll have to see.”

Finance Minister Guido Mantega insisted on 27 June that green shoots were apparent in the struggling economy. Tellingly, he refused to put a figure on growth, saying only: “We’re working with numbers based on the budget estimates. We have strong growth in investment in agriculture. Industry is recovering and services are showing a reasonable behaviour, growing at moderate rates. We are getting over the international difficulties and certainly we will have more growth this year than last”. Latest industrial production figures seem to contradict that (see sidebar).

Officially, the treasury is working on the basis of real annual GDP growth of 3.5% this year; its next revision is coming up. The original 2013 budget was based on real GDP growth of 4.5%. On the fiscal side, tax revenues for the first five months amounted to R$458.3bn, up 0.77% over the same period of last year in real (inflation-adjusted) terms.

However, that take is not enough for the treasury to meet its annual budget surplus targets for 2013. The target is a public-sector primary surplus of about 2.3% of GDP. The 12-month surplus as of April was R$86bn, or 1.9% of GDP. Revenues are lagging on slower growth and also due to the cumulative effects of the slew of official tax breaks for producers and consumers put in place by the Rousseff team.

Mantega insisted that spending would be cut if necessary to reach the target, a brave pledge that may not square with political expediencies ahead of the October 2014 general election.

• Forecasts dip again

Industrial production fell more than expected in May, prompting private economists revise down their annual growth forecasts to below 2.0%. The index fell 2.0% month-on-month in May over April. It rose 1.4% year-on-year over May 2012 and 1.7% in the first five months of 2013. Positively, capital goods output, the key indicator of manufacturing sentiment, was up 12.5% year-on-year over May 2012 and rose 13.3% overall in the first five months. However analysts revising down their forecasts are also taking into account the impact of higher interest rates on producers and consumers, sticky inflation (exacerbated by a weaker Real), and the economic disruption caused by the June protests.