Brazil looks to prioritise growth

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Arno Augustin

Brazil's Treasury Secretary Arno Augustin.

The Brazilian government is willing to relax its fiscal discipline to prioritise economic growth in 2013, Treasury chief Arno Augustin told Reuters, backing away from one of the country's main economic policy pillars of the last decade.

Augustin said Brazil does not need to fully meet its closely watched primary budget surplus target to keep finances in good standing, since the economy has matured.

“What's new, and has been for several years now, is that the government prioritizes the economy to determine fiscal policy,” Augustin said in a interview late on Tuesday.

“In the past, it was difficult to make changes to the primary (surplus) target because there were doubts about the medium-and-long sustainability” of Brazil's indebtedness, Augustin said. “Now, that sustainability is assured.”

His comments are some of the most explicit by an official to recognise that the Brazilian government is moving away from the strict fiscal management rules credited with ushering in macroeconomic stability after decades of crises.

A more flexible fiscal policy also highlights President Dilma Rousseff's efforts to remove some of the safeguards that protected the Brazilian economy from disaster over the past decade, but have also restrained growth.

Augustin, whom other officials in Brasilia say has gained considerable influence with Rousseff over the past year, went as far as to say that the government could even drop the primary surplus target in favour of an overall budget balance goal that includes debt payments. However, he stressed that no decision has been made on the matter.

The primary surplus, or revenues minus expenditures excluding debt payments, is a gauge of a country's ability to repay its obligations, an d is watched by investors.

The government missed its 2012 primary surplus goal of 139.8 billion reais ($68.64 billion) by a long shot after a slowdown in tax revenues. Officials tapped into the government's sovereign wealth fund and brought forward dividend payments from state-run companies to meet an already reduced primary goal.

Some analysts have criticised the government for using what they describe as “creative” accounting methods that undermine the country's reputation for fiscal prudence.

Many outside auditors, including the International Monetary Fund, do not recognise the accounting methods used by the Brazilian government to meet the target. For example, in 2010 when Brazil also lowered the goal by excluding some infrastructure investments, the IMF said Brazil's primary budget surplus was equal to 2.4 percent of GDP and not the 3.1 percent announced by the government.

DEBT BURDEN FALLS

Augustin said the government has the legal right to use those accounting tools. To further increase its fiscal maneuvering, the government proposed for the first time in this year's budget bill an option to exclude some tax deductions from its primary target of 155.9 billion reais.

Augustin said record low interest rates will keep pushing down the debt burden and give the government extra room to bolster an economy that has struggled to grow since mid-2011.

To the envy of a highly indebted United States and euro zone, Brazil has been able to slash its public debt from nearly 60 percent of GDP to a record low of about 35 percent today.

“In the past, if we didn't meet the primary target, the debt-to-GDP (gross domestic product) ratio increased. Now, if we do a primary surplus a bit below or above the target, the ratio will continue to fall,” Augustin said.

Still, even after easing fiscal rigor to give more stimulus to local businesses the government failed to prop up an economy that likely grew a meagre 1 percent last year.

To foster growth, Augustin said the government will ensure there is a 20 percent reduction in power rates this year despite a historic drought that will likely increase generation costs. He added that the reduction of energy rates will likely trim more than half a percentage point off annual inflation in 2013.

He said that the economy is picking up speed this year and that the government planned to sell dollar-denominated debt abroad in the first quarter to highlight investors' confidence in Brazil's fiscal management.

In September, Brazil sold $1.35 billion in 10-year global bonds to yield 2.686 percent, the lowest rate ever, as developed-world investors sought emerging-market obligations that yields more than bonds in their markets.

“We will make a good debt sale and those people who have doubts about the fundamentals of our country will see that they remain solid,” Augustin said. - Reuters


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