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July 30, 2014
Friday, February 21, 2014

Brazil cuts 2014 budget, GDP estimate

Brazil’s Finance Minister Guido Mantega (left) shares a laugh with Brazil''s Planning Minister Miriam Belchior before the announcement of cuts in the Federal Budget and revised 2014 GDP growth projections, at the Finance Ministry in Brasília.
Economic growth and inflation rates projected to fall as positive employment figures released

BRASILIA — Guido Mantega and Miriam Belchior, Brazil’s Finance and Planning ministers, yesterday presented a mixed bag of economic announcements and revisions to reassure emerging-market watchers nervous about projections for Brazil’s performance in 2014.

The primary announcement revolved around the decision to cut 44 billion reais (approximately US$18.41 billion) from the 2014 federal budget in a bid to keep the primary budget surplus at 1.9 percent of the Gross Domestic Product (GDP), which was the same target for 2013.

The cuts, which will not be extended to the government’s spedning on heatlh, education, social services and technology, are larger than the cuts put into place in 2013, which totalled 38 billion reais (approximately US$ 15.90 billion).

Inflation and GDP figures

Mantenga justified the cuts on the basis that it will allow Brazil to achieve “fiscal consolidation,” which in turn will drop the projected annual inflation rate from 5.8 percent to 5.3 percent and allow for a sustained growth in the GDP, which was revised downwards from 3.8 percent to 2.5 percent for 2014.

The 2.5 percent figure is still higher than private projections, which situate the expected 2014 GDP growth at a more more modest 1.79 percent.

The federal government in 2013 shaved 28 billion reais (US$11.80 billion) from the budget, as well as 10 billion reais (US$4.22 billion) to cover states and cities, while posting a primary surplus of 1.9 percent of GDP. That fell short of its 2.3 percent target, which had been reduced from about 3.1 percent at the start of last year.

Brazil’s budget deficit in 2013 reached 157.6 billion reais (US$66.43 billion) the Central Bank said on January 31. That's the biggest year-end deficit since the series started in 2002.

The announcements are designed to reassure the market that fiscal policy will be restrained in 2014 as in 2013 public spending was used to sustain economic growth, leading to a corresponding jump in the budget deficit and the inflation rate.

Bloomberg news has reported that inflation rates have remained above the Central Bank’s 4.5 percent target for more than three years, reaching 5.59 percent in the first month of 2014. Consumer prices have prompted central bankers to lift the benchmark overnight rate by 3.25 percent since April.

Rating agency anxiety

International ratings agencies have been eyeing the inflation rate and Brazil’s fiscal policy with concern, and analysts have suggested that the budget cuts will likely satisfy the market and the agencies. The market will nonetheless be watching how the government carries out the cuts and if it sticks to them in an election year. The move also trakes pressure off the Central Bank, giving it some room for further interest rate increases in the future if necessary.

Nonetheless, not all of the economic news from Brazil yesterday was negative.

The Brazilian Geographic and Statistical Institute announced that unemployment remains at historical lows and that last month January it reached 4.8 percent, the lowest figure for a January in 11 years.

Furthermore, Labour Ministry data shows that just under 30,000 formal jobs were created in January, which is greater than the value for January 2013.

Brazilian President Dilma Rouseff, who is currently leading in the polls, must safely navigate a World Cup year and international economic nervousness concerning emerging markets to convert that lead into a succesful presidential re-election bid.

Yesterday’s announcements seem designed to signal that her administration is prepared to reassure international markets that Brazil remains safe to invest in.

Herald with AP, Bloomberg, Télam

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