Analysis: Brazil may be spending its way towards a downgrade

Tue Sep 10, 2013 3:34pm EDT
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By Silvio Cascione and Asher Levine

SAO PAULO (Reuters) - Brazil's finances are set to deteriorate substantially next year, leaving the government with few options to revive a sputtering economy and raising the threat of a credit downgrade.

The government is likely to miss its key 2014 budget target, the primary surplus, by as much as 50 billion reais ($22 billion), delivering only about half its goal, estimates by Reuters and private economists show.

Unlike most other countries, Brazil's most-watched budget goal strips out interest payments on its debt, meaning its overall deficit would widen if the primary surplus dwindles.

Such an event could deal a major setback to Latin America's biggest economy, which won its investment-grade credit rating in 2008 through a commitment to fiscal responsibility and strong economic growth.

Growth, however, has slowed sharply since 2011, and President Dilma Rousseff has unleashed costly tax breaks and credit subsidies in response.

The strategy has not only failed to support the economy, but also has exacerbated Brazil's fiscal woes. Meanwhile, with Rousseff expected to enter a hotly contested run for a second term next year, she is unlikely to make major spending cuts because they could anger her fragile political coalition.

A credit downgrade, already priced in by credit default swap markets for mid-next year, would put Brazil's rating just one notch above junk status, making government and corporate borrowing more expensive and further eroding economic growth.

A downgrade could also complicate efforts to curb inflation by triggering further weakness in Brazil's currency, which has lost 10 percent of its value against the dollar this year.   Continued...

Brazil's President Dilma Rousseff speaks during a ceremony where she signs into law, the bill that allocates the country's oil royalties to education and health care, at the Planalto Palace in Brasilia September 9, 2013. REUTERS/Celso Junior