ANALYSIS-Brazil's deficit seen haunting next gov't
Reuters, Wednesday, August 05, 1998 at 20:14
By Shasta Darlington
SAO PAULO, Aug 5 (Reuters) - Brazil caught economists off
guard Monday when it changed the way it reports the country's
budget deficit, but more unsettling is what lurks behind the
figures, economists said.
"Brazil tried to make the numbers look a little better, but
that doesn't change a situation that nobody really sees
improving before (October 4 presidential) elections," said
Joyce Chang, director of emerging markets fixed-income research
for Merrill Lynch.
Brazil's central bank said Monday that it posted a nominal
budget deficit, which takes debt costs into account, equivalent
to 6.52 percent of gross domestic product (GDP) in the
January-May period.
"The public is left with the impression that the government
is trying to hide negative information about the public
accounts with the next elections in view," daily O Estado de
Sao Paulo wrote in its editorial on Wednesday.
The figures briefly confused analysts who had grown
accustomed to Brazil reporting the budget deficit over 12
months through the latest month being reported.
Since December 1996, the Central Bank has measured the
public sector budget deficit over 12 months, with the shortfall
in the 12 months to April reaching 6.72 percent of GDP.
The deficit is currently the most closely watched of all
Brazilian economic indicators.
Economists consider it the Achilles heel of the country's
four-year-old anti-inflation plan because it makes the real
currency vulnerable to speculative attack.
One day after the official announcement the Central Bank
said that May's year-on-year nominal budget deficit had been of
7.02 percent, economists said.
Brazil hasn't seen a deficit that big since 1995, and then
it was mostly a reflection of soaring inflation that the
government was struggling to bring under control.
Economists blame the Cardoso administration's failure to
cut expenditures and reign in spendthrift state and municipal
governments during an election year combined to worsen the
deficit.
These also promise to be the biggest headaches for the
administration that steps in after the October election --
which polls show will be won by President Fernando Henrique
Cardoso.
The majority of congressional seats and all state
governorships and municipal posts will be on the ballot.
The federal government has been reluctant to reign in
spending during an election year.
"There's a lot left to be done, but they're going to write
it off until next term," Merrill Lynch's Chang said.
"There will have to be a change, a stronger commitment to
fiscal improvement after then," said Carlos Kawall, chief
economist at Citibank's Brazil operations.
"There's a whole package of $20 billion in cuts but they
couldn't put into effect the expenditure cuts in an election
year," Chang said.
There are some almost immediate measures the post-election
government is expected to take, economists said.
One is job cuts. Cardoso never enforced many of the
personnel spending cuts that were approved by Congress at the
end of last year as an emergency response to the crisis in
Asia.
Many of the 33,000 announced civil servant layoffs were
never carried out. The government also failed to implement
budget cuts in education and health earlier this year.
Under the end-1997 austerity plan, spending cuts were
expected to save the government 5.3 billion reais while a
reduction in state loans was expected to cut costs 3 billion
reais. But they didn't materialize.
Another one of the 50 planned austerity measures announced
-- of 5 percentage point increase of the vehicle production tax
-- was repealed just this week by the government.
Economists said they didn't see the new government
implementing a new package of reforms in the short-term, though
the administration could try to enforce some of the cuts
already approved and focus on other isolated items.
"Cardoso tends to seek a consensus and that limits his
ability to reign in spending," Chang said.
Public servants' salaries could be cut further by
consolidating ministries and other positions which would allow
the government to reduce the income of workers considered
"redundant," Citibank's Kawall said.
However, there are some developments before October which
could curb the deficit, economists said.
A further reduction in interest rates and the extension of
the growing stock of short-term domestic debt is expected to
begin before elections and pick up speed after October.
Interest rates have slowly come down from a peak of 43
percent last November when the Central Bank almost doubled
rates to protect the nation's currency from a speculative
attack amid the Asia crisis.
Even if rates don't fall any lower than today's 19.75
percent, the government can expect to save the equivalent of
1.0 percent of GDP in interest payments, Kawall said.
Inflow from Brazil's massive privatization program has
helped to write off some of the debt.
After the election, the government is going to have to step
up efforts to extend the maturities and bring interest payments
down, Chang said.
Following the swearing-in of the new Congress in February,
the government can jump-start the long-stalled effort to reform
social security.
That would help cut a deficit in the pension system that by
the end of 1998 is expected to reach $7.2 billion.
shasta.darlington@reuters.com))
Copyright 1998, Reuters News Service |
