Brazil Takes Measures to Avoid Credit Downgrade

Brazil’s government announced a package of measures, including a 44 billion real (BRL) – or US$18.4bn – freeze in public spending and a more modest fiscal savings target, in a bid to reassure investors and shore up its credit rating.

The administration of president Dilma Rousseff, which faces elections in October, also lowered its primary budget surplus target to 1.9% of gross domestic product (GDP), a ‘conservative’ target that officials said would still enable Brazil to reduce its debt burden.

Shrinking primary surpluses have raised the country’s overall budget deficit, which includes interest payments, to a three-year high of 3.28% of GDP. In 2012, the deficit was 2.48% of GDP.

Formerly a star of the so-called BRICS (Brazil, Russia, India, China and South Africa) emerging economies (EMs), Brazil achieved economic growth of 7.5% in 2010 but its performance has steadily deteriorated since and recent preliminary data from the central bank suggests the country slipped into recession in the second half of 2013.

However, government spending has not been reduced. Brazil missed its primary surplus goal of 3.1% in 2012 and again failed to meet a lower target of 2.3% last year.

Since ratings agency Standard & Poor’s (S&P) placed Brazil’s credit rating on a negative rating last June, the government has been under intense pressure to improve its fiscal policy. Last month Rousseff attended the World Economic Forum (WEF) in Davos for the first time in a bid to woo business leaders and potential investors, having missed the event two years earlier in favour of a visit to Cuba.

A poll of 35 economists conducted by Reuters found that 22 of them believe the government will still miss the new target for 2014, but most expect Brazil to avoid a credit downgrade this year.

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