Brazil's budget deficit continues

Brazil posted a primary budget deficit for the second straight month, as policy makers struggle to fortify fiscal accounts during an economic slowdown.

The nominal budget gap in June narrowed to 20.8 billion reais ($9.2 billion) from 32.4 billion reais a month earlier. The primary deficit, excluding interest payments, in the same month was 2.1 billion reais, a wider gap than the median forecast of a 1.1 billion-real deficit from 16 economists surveyed by Bloomberg.

President Dilma Rousseff’s administration this year has given up billions of dollars through tax cuts even as its fiscal management comes under scrutiny. Reduced levies on goods from furniture to automobiles comes as economists expect the world’s second-largest emerging market to grow at the slowest pace since the recession in 2009. While officials have reiterated pledges to meet this year’s fiscal goals, today’s result takes budget results further away from the target.

Swap rates on the contract due in January 2017, the most traded in Sao Paulo today, rose six basis points, or 0.06 percentage point, to 11.49 percent at 10:42 a.m. local time. The real weakened 0.9 percent to 2.2656 per U.S. dollar.

The primary surplus as a percentage of gross domestic product in the year through June was 1.36 percent of gross domestic product, compared with 1.52 percent last month, the central bank report said today. Brazil’s government said in February it is targeting a 1.9 percent primary surplus target this year.

Tax cuts

Brazil is extending tax cuts on furniture, paneling and fixtures to year-end, the Finance Ministry said in a June 30 statement. On the same day, the government said it would extend a tax cut on vehicle purchases after the industry pressured for assistance amid slowing sales.

Those measures follow policies announced earlier in the year that will provide tax breaks to exporters of manufactured goods and reduce payroll levies for 56 industries.

The central government in June posted a 1.9 billion-real deficit, excluding interest payments, compared with a 10.5 billion-real deficit a month earlier, the Treasury said in a report distributed in Brasilia yesterday. The median estimate from 16 economists surveyed by Bloomberg was for a 1 billion- real deficit.

Standard & Poor’s in March downgraded Brazil’s sovereign credit rating one level to BBB-, one step above junk, with a stable outlook. The move ended a decade-long stretch of upgrades for the world’s second-largest emerging market.

Benchmark rate

Policy makers on July 16 decided to hold the benchmark Selic unchanged at 11 percent for the second straight meeting after increasing borrowing costs by 375 basis points in the 12 months through April. Annual inflation through mid-July reached 6.51 percent, above the 6.5 percent ceiling of policy makers’ target ran.

Brazil’s economy expanded 0.2 percent during the first three months of this year, compared to 0.4 percent growth in the fourth quarter of 2013. Analysts in a weekly central bank survey expect growth to slow to 0.9 percent this year, according to the study published July 28.

Latin America’s largest economy expanded by 2.5 percent in 2013.

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