Brazil is trying to stop fiscal deterioration, says BofA Merrill Lynch
S&P changing Brazil’s rating outlook from neutral to negative triggered a government response to try to improve confidence in the economy, according to a BofA Merrill Lynch Global Research report.
Notably, the Brazilian Central Bank shifted to a more hawkish stance earlier this year in an effort to increase confidence. However, the BCB’s efforts have not been sufficient. With monetary and fiscal policies clearly going in opposite directions.
After reaching 3.7% of GDP in July 2011, the 12-month primary surplus declined to below 2% of GDP in recent months. History shows lower interest rate levels lead to a lower primary surplus requirement to allow government debt to decline.
That said, lower surpluses combined with the perception that the government was using some accounting me asures to achieve the primary surplus target changed the perception about Brazilian fiscal policy significantly.
In fact, while the net debt to GDP ratio has remained relatively stable around 35% of GDP since April 2012, gross debt moved to 56.6% of GDP in May 2013 from 54.1% of GDP in December 2011. The focus has been on gross debt and on the overall fiscal balance, as t hose measures had less impact from the accounting changes implemented by the administration.
The fiscal deterioration has been an important element explaining the steepness of the Brazilian local yield curve, as well as the increase in Brazilian CDS spreads relative to other emerging market peers.
In our view, the concern over the possibility of changes in Brazilian ratings created the need for a shift in the fiscal approach. Some months ago, no one would have imagined that the government would be willing to announce additional budget cuts with a weak economic backdrop like this current one.
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