A drought that threatens to stretch Brazil's finances this year is making the government rethink its key fiscal goal, potentially paving the way for a smaller primary surplus target, a member of the administration's economic team told Reuters.
Just a few months ago the government of President Dilma Rousseff was considering adopting a primary surplus target equivalent to at least 1.9 percent of gross domestic product, the savings result obtained in 2013.
But the rising energy bill caused by a severe drought has policymakers doubting that goal can be met, and some believe a lower target would be more achievable. No decision has been made yet on the 2014 target, which could be announced as soon as next week, the official said late on Tuesday.
"We need to have an internal discussion about the energy bill and its trade-offs," said the official, who asked not to be named to speak freely. "We need to find a balance between our fiscal position and prices."
The drought has sapped output at hydroelectric plants, forcing utilities to rely on more expensive thermal energy to secure supply. The government is considering assuming part of that cost to avoid passing that burden to consumers, which could push up inflation and stunt economic growth. [ID:nL2N0LG1D2]
That extra cost, which has not been calculated yet, will hit fiscal accounts in an electoral year in which, analysts say, the government will be under pressure to spend more and have less resources available. [ID:nL2N0LC1CV]
For Rousseff, who is expected to run for re-election in October, a robust, yet achievable fiscal goal is key to allay the threat of a credit downgrade and convince investors that she has not abandoned prudent fiscal policies.
A downgrade could further rattle financial and real economy investors already worried by the recent sell-off in emerging markets triggered by a slowdown in the Chinese economy and a withdraw of monetary stimulus in the United States.
Although Brazil is in better fiscal shape than many developed nations, its primary surplus - or excess revenue over expenditures before debt payments - has shrank in the last three years from 3.11 percent of GDP to 1.9 percent. The surplus is seen as a measure of the country's ability to repay debt.
A surplus of 1.8 percent of GDP will likely be enough for the country's debt burden to keep falling this year, according to calculations from other government officials.
The primary surplus has been dragged down by a slowing Brazilian economy and a slew of tax breaks offered by the government in an attempt to revive activity.
That more expansionary fiscal stance has forced the central bank to raise its benchmark Selic rateby 325 basis points to 10.50 percent since April to curb a surge in prices.
The aggressive monetary tightening cycle, which is expected to continue, has raised worries that the bank could further cool an economy expected to post a fourth year of subpar growth.
However, the impact of monetary policy on Brazil's growth has weakened, the official said, meaning that economic activity will suffer less from the current rate-hiking cycle.
"The effects of monetary policy are not as strong as before," said the official, who added that a recovery in developed nations will likely bolster exports and help the economy grow more than the 1.9 percent that most private economists expect for the year.
The official said that a drop in loan delinquencies has kept banks' credit rates from rising in tandem with the Selic. A likely increase in credit disbursements this year will further reduce the impact of monetary policy, the official said.
Source: Reuters
Just a few months ago the government of President Dilma Rousseff was considering adopting a primary surplus target equivalent to at least 1.9 percent of gross domestic product, the savings result obtained in 2013.
But the rising energy bill caused by a severe drought has policymakers doubting that goal can be met, and some believe a lower target would be more achievable. No decision has been made yet on the 2014 target, which could be announced as soon as next week, the official said late on Tuesday.
"We need to have an internal discussion about the energy bill and its trade-offs," said the official, who asked not to be named to speak freely. "We need to find a balance between our fiscal position and prices."
The drought has sapped output at hydroelectric plants, forcing utilities to rely on more expensive thermal energy to secure supply. The government is considering assuming part of that cost to avoid passing that burden to consumers, which could push up inflation and stunt economic growth. [ID:nL2N0LG1D2]
That extra cost, which has not been calculated yet, will hit fiscal accounts in an electoral year in which, analysts say, the government will be under pressure to spend more and have less resources available. [ID:nL2N0LC1CV]
For Rousseff, who is expected to run for re-election in October, a robust, yet achievable fiscal goal is key to allay the threat of a credit downgrade and convince investors that she has not abandoned prudent fiscal policies.
A downgrade could further rattle financial and real economy investors already worried by the recent sell-off in emerging markets triggered by a slowdown in the Chinese economy and a withdraw of monetary stimulus in the United States.
Although Brazil is in better fiscal shape than many developed nations, its primary surplus - or excess revenue over expenditures before debt payments - has shrank in the last three years from 3.11 percent of GDP to 1.9 percent. The surplus is seen as a measure of the country's ability to repay debt.
A surplus of 1.8 percent of GDP will likely be enough for the country's debt burden to keep falling this year, according to calculations from other government officials.
The primary surplus has been dragged down by a slowing Brazilian economy and a slew of tax breaks offered by the government in an attempt to revive activity.
That more expansionary fiscal stance has forced the central bank to raise its benchmark Selic rate
The aggressive monetary tightening cycle, which is expected to continue, has raised worries that the bank could further cool an economy expected to post a fourth year of subpar growth.
However, the impact of monetary policy on Brazil's growth has weakened, the official said, meaning that economic activity will suffer less from the current rate-hiking cycle.
"The effects of monetary policy are not as strong as before," said the official, who added that a recovery in developed nations will likely bolster exports and help the economy grow more than the 1.9 percent that most private economists expect for the year.
The official said that a drop in loan delinquencies has kept banks' credit rates from rising in tandem with the Selic. A likely increase in credit disbursements this year will further reduce the impact of monetary policy, the official said.
