Brazil Throws In Towel On Budget; Citi Compares Fiscal Outlook To “Bloody Terror Film”
Late last week, Brazil officially entered a recession as the economy contracted 1.9% in Q2, a quarter in which Brazilians suffered through the worst stagflation in over ten years.
What was perhaps worse than the GDP print however, was budget data for July which was meaningfully worse than expected. “On a 12-month trailing basis the consolidated public sector recorded a 0.9% of GDP primary deficit in July, worse than the 0.6% of GDP deficit recorded in December and, therefore, increasingly distant from the new unimpressive +0.15% of GDP surplus target,” Goldman noted.
We summed the situation up as follows: “No primary surplus for you!”
And while analyzing LatAm fiscal policy doesn’t make for the most exciting reading in the universe, this particular budget battle is critical for a number of reasons, the most important of which is that Brazil’s investment grade credit rating might just depend on it and to the extent the country is forced to concede that it will not, after all, hit its primary surplus target this year, junk status could be just around the corner. Needless to say, if Brazil is cut to junk, that will do exactly nothing to help the country combat a bout of extremely negative market sentiment tied to Brazil’s rather prominent role in the great emerging market unwind.
Sure enough, government sources have now confirmed that embattled President Dilma Rousseff – whose political woes are making it nearly impossible to pass legislation designed to plug gaps – will now submit a 2016 budget proposal that projects a deficit. Here’s Bloomberg:
The Brazilian government will send to Congress Monday a budget proposal for 2016 that projects a primary deficit instead of the previously expected surplus, according to two government sources familiar with the matter.
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