Itaú BBA - Budget deficit proposed for 2016

Brazil Review

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Budget deficit proposed for 2016

septiembre 1, 2015

The government submitted a budget proposal with a primary deficit which is insufficient to stabilize the public debt.

The Brazilian Economy in August 2015

The government has proposed a primary budget deficit for 2016. The fiscal results remain negative and tax-increase measures continue to be discussed. GDP posted a significant decline in the second quarter, while the unemployment rate accelerated. The adjustment of the external accounts continues. Inflation reached 9.6% and the central bank indicated that the rate-hiking cycle has ended, but that exchange-rate depreciation is a risk. The government’s popularity is below 10%. The Attorney General, Rodrigo Janot, was reappointed. A majority of the Electoral Court voted to investigate the 2014 presidential campaign.

Government proposes a budget running a deficit for 2016

The government submitted a budget proposal for 2016 to Congress, with a primary deficit of 0.34% of GDP, which is insufficient to stabilize the public debt. The target initially indicated for 2016 was a surplus of 2% of GDP.

New deficit posted in the public accounts in July

The fiscal accounts again posted a deficit. In July, the primary deficit stood at BRL 10 billion, including BRL 7 billion from the central government and BRL 3 billion from states and municipalities. In 12 months, the consolidated public-sector deficit stood at 0.9% of GDP.

Discussion on tax increases continues

The government managed to approve an increase in payroll taxes in the Senate, which will likely contribute to an increase of BRL 6 billion in revenues next year, according to our estimate. Congress is debating the increase in the social contribution on profits (CSLL) paid by the financial sector, and the latest proposal was an increase from 15% to 20%, effective until 2018. In addition, the Senate continues to process a measure that legalizes funds held by Brazilian citizens abroad. Finally, the reinstatement of the tax on financial transactions (CPMF) was discussed for a few days, but ended up not being proposed by the government.

Sharp drop in GDP in the second-quarter

GDP declined by 1.9% in the second quarter of 2015. We highlight a further contraction in domestic demand. Investment dropped for the eighth consecutive quarter, while household consumption dropped for the second time. On the supply side, the industry posted the largest contraction since the first quarter of 2009, the service sector fell for the second consecutive quarter and agriculture and livestock also posted negative results. The latest data released show no reversal of the weakness in economic activity. We expect further decline in activity in the third quarter.

New increase in the unemployment rate

The unemployment rate reached 7.5% in July, above market expectations and our forecast (7.2%). Seasonally adjusted, the rate increased from 6.7% in June to 7.2% in July. The result was due to a growing number of people looking for jobs, which increases the economically active population (EAP). The real wage bill remains weak and is 3.3% below the level posted in the same month last year.

The adjustment of the external accounts continues

The current account deficit continues to fall. In July, it stood at USD 6.2 billion, lower than expected. In the first seven months of the year, it adds up to USD 44 billion, a decline of 24% compared to the same period last year. External financing has also dropped: direct investment totaled USD 37 billion in the same period, a decrease of 33%.

IPCA-15 reaches 9.6% in 12 months

The IPCA-15 increased 0.43% in August, in line with our forecast and market expectations. With this result, the year-over-year rate rose to 9.6%, the highest reading since December 2003. The largest upward contributions during the month came from housing (especially electricity), food and beverages, health and personal care and personal expenses.

Copom minutes: end of hiking cycle, but exchange rate is a risk

In the minutes released after the decision to hike the interest rate to 14.25%, the Brazilian Central Bank’s Monetary Policy Committee (Copom) highlighted the slowdown in economic activity and reinforced the signal that the Selic rate is likely to be maintained at this level for an extended period. But the Copom also indicated that a change in strategy is possible, if the exchange-rate depreciation caused by the worsening fiscal outlook leads to “significant deviations” of inflation forecasts from the target.

Government approval in single-digit territory

According to a Datafolha poll conducted on August 4 and 5, government approval fell from 10% in June to 8% this month. This is the lowest approval level observed since September 1992. On August 16, anti-government demonstrations took place in various cities across the country. The number of people attending was significant, but lower than in March 2015.

Attorney General Rodrigo Janot is reappointed; TSE votes for investigating campaign

After being questioned by the Senate, Attorney General Rodrigo Janot was reappointed for two more years in office. The Attorney General is responsible for prosecuting politicians, with special jurisdiction in the Federal Supreme Court. The Superior Electoral Court (TSE) voted by a majority to continue investigating irregularities in the Rousseff campaign, but the trial is not over yet due to a request for examination by a tribunal member.

Markets deteriorate

The exchange rate reached BRL/USD 3.65, a 7.4% depreciation over the previous month. This is the highest level since 2002. The Ibovespa index dropped 8.3% in reais and 14.7% in dollars. The country risk measured by the 5-year CDS closed the month at 351, up by 58 bps.

What’s Next?

The government has until September 11 to present its defense before the Federal Audit Court on a trial on possible irregularities in the management of public accounts.

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