World Economy

Brazil Primary Budget Deficit Swells

Brazil Primary Budget Deficit Swells
Brazil Primary Budget Deficit Swells

Brazil’s primary public sector budget deficit widened sharply in November, the central bank said, as falling tax revenues undermined government efforts to shore up public accounts amid a deepening recession.

At 19.56 billion reais ($5.07 billion), the November primary shortfall was the third worst on record. The deficit, which represents revenues minus expenditures before debt interest payments, is a closely watched gauge of creditworthiness.

The November shortfall surpassed October’s 11.5 billion reais and also topped the Reuters poll forecast of 14 billion reais.

President Dilma Rousseff has failed to plug a widening deficit, as her left-leaning government seeks to safeguard welfare payments and a restive Congress blocks passage of bills to raise revenues. Including debt payments, Brazil’s overall deficit was running at a hefty 9.3% of gross domestic product in the 12 months through November.

In December, Fitch became the second credit ratings agency to cut its rating on Brazilian debt from investment-grade to junk status, which meant that many foreign investments funds, under their bylaws, could no longer invest in the country.

On Tuesday, the central bank said it expects Brazil’s gross debt to climb to 70.7% of gross domestic product next year, above the 70% threshold ratings agencies see as a debt-servicing risk factor.

 Short of Target

November’s weak tax revenues suggested the government would fall short of its 2016 goal, Itau Unibanco said in a research note. “We see a rising risk of a stronger decline in tax collection next year, with negative impacts on the primary result,” it said.

Rousseff on Tuesday also announced an 11.6% increase in the monthly minimum wage, to 880 reais next year, according to a legally binding formula based on the previous year’s inflation plus economic growth from two years prior. Pensions are pegged to the minimum wage, eventually adding pressure to public finances.

The impact on next year’s budget from the higher wage will total 4.77 billion reais, of which three billion reais will go to fund social security stipends, 612 million reais to permanent pensions under a social assistance program and 1.1 billion reais to a fund to pay for unemployment benefits.

The increase means the government will have to raise pension payments by an equal amount. Pension payments represent about a quarter of all budget spending.

In the 12 months through November, the primary budget deficit rose to 0.89% of GDP from 0.71% in the 12 months through October.

That shortfall is likely to rise sharply this month as the government moves to pay back 57 billion reais borrowed from state-run banks and a workers’ fund.

The immediate payment of those debts will eliminate liabilities for next year, but not save the government from recording a hefty deficit, Itau said in its note.