Brazil’s Widening Fiscal Deficit Pressures Budget Goals

(Bloomberg) — Brazil’s fiscal deficit widened in November from the year prior thanks to a decline in central government revenues, highlighting the challenge President Luiz Inacio Lula da Silva faces as he seeks to shore up public accounts in 2024.

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The government posted a primary deficit of 37.3 billion reais ($7.6 billion) in November, according to central bank data released Friday. It is the worst November result since 2016, and marked a significant deterioration from a deficit of 20 billion reais a year ago. The figure takes into account results from the country’s pension system, regional governments, some state-owned companies and the central bank.

Lula’s administration is pushing to eliminate the primary deficit, which excludes interest payments, in 2024, and Finance Minister Fernando Haddad last year secured congressional approval for a series of bills to increase revenues after months of negotiations with lawmakers. Congress also passed an overhaul of Brazil’s tax code.

Read More: Brazil Congress Gets Haddad Closer to Zero 2024 Fiscal Deficit

Those end-of-year developments were “good news” that “suggest that the balance of risks is asymmetrical toward a better result for this year,” JPMorgan Chase & Co. analysts Mirella Sampaio and Cassiana Fernandez wrote in a research note. They had previously estimated a deficit of 0.9% of GDP for 2024.

Still, most analysts doubt Haddad will deliver on his promises to hit the zero-deficit target.

The recently-approved measures to bolster Brazil’s bottom line “will take some time to materialize,” Tiago Sbardelotto, an economist at XP Investimentos, wrote in a research note. “We see an improvement in revenues but the rise in expenditures is much stronger.”

November’s higher-than-expected primary deficit was influenced by an expenditure of 11 billion reais to compensate regional governments for revenue declines that resulted from former President Jair Bolsonaro’s decision to cut taxes ahead of 2022 elections.

But the central government’s budget also worsened over the year overall, with a deficit of 137 billion reais in the period from January to November as spending increased and revenue fell. By comparison, it posted a surplus of nearly 49 billion reais during the same time frame in 2022.

“The clearly expansionary fiscal policy and the reluctance to control spending severely undermines the credibility of the fiscal targets,” Alberto Ramos, a Latin America analyst at Goldman Sachs Group Inc, said in a recent research note.

He sees the country’s primary deficit exceeding 2% of gross domestic product in December 2023. Most analysts bet it will be around 0.8% of GDP by the end of 2024.

A “weak” and “unreliable” fiscal anchor is also likely to sustain analysts’ bets that inflation will remain above the central bank’s 3% goal through 2026, Ramos wrote.

“Placing the debt dynamics on a structural sustained declining trend and building fiscal buffers remains a key macro challenge,” he added.

The monetary authority has cut interest rates by 2 percentage points since August and plans two more 50-basis point reductions, while also signaling that unanchored inflation expectations are a reason of concern.

(Updates with economist comments from fourth paragraph. A prior version was corrected to describe chart to “gross debt to GDP.”)

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