The cut in the official primary surplus target to 1.9% of GDP for 2014, from 2.3% previously, was welcomed by private economists as an overdue ‘reality check’.
Announcing the move at a press conference on 20 February, Finance Minister Guido Mantega said the government would freeze R$44bn (US$18.44bn) in public spending to meet the primary surplus target, up from R$38bn last year. “Our projections are attainable and realistic and conservative, so we should deliver this result in December," he stated. The revised projection is based on real GDP growth of 2.5% year-on-year in 2014 (down from a previous forecast of 3.8%), with inflation of 5.3% (down from 5.8% previously).
Markets welcomed the move and the Real rose 1% in response to close the day at R$2.37/US$, its strongest level since 21 January. Yet fiscal analysts remain slightly sceptical as to whether the government will be able to deliver on its promise ahead of President Rousseff’s bid for re-election in October. Steadily shrinking primary surpluses mean that the overall budget deficit hit a three-year high of 3.2% of GDP in 2013, up from 2.48% in 2012.
- Energy subsidies
Following shock blackouts affecting 6m people across 11 southern and eastern states on 11 February (which the government insisted had nothing to do with the increase in demand caused by the heatwave being experienced in much of the country), the Rousseff government on 13 March announced new measures in support of electricity distributors struggling with high power costs on the back of the recent drought, and also in an effort to contain inflationary utility prices rises this election year. Under the package, the government will provide an additional R$4.0bn (US$1.7bn) of financial support (i.e. subsidies) for power distributors, who have been forced to pay more for thermal power to cover a drop in hydroelectricity supplies, while the country's electricity clearing house will also be permitted to see up to R$8.0bn in private financing to support the distributors. The government will also auction off any excess electricity in April Gradual electricity prices rises will be allowed as of 2015 only, when Rousseff hopes to be safely back in the Planalto for a second four-year term.
Treasury secretary Arno Augustin said the R$4.9bn in subsidies would be covered by an extension of a corporate tax settlement program and possible tax increases this year, with specifying. Critics said the measure was a short-term fix to repress inflation in an election year and expressed scepticism as to the government’s insistence that the measures will be fiscally neutral.
- Govt denies electricity rationing on the cards
The federal government puts the prospect of energy rationing in the country at just 2%-3%, below the 5% that the main grid operator, Operador Nacional do Sistema Elétrico (ONS), works with on a permanent basis, according to Paulo Pedrosa, executive president of Associação Brasileira de Grandes Consumidores Industriais de Energia e de Consumidores Livres (Abrace), who made the announcement on 18 March after a meeting between the government and electricity sector representatives. Operators told Energy Minister Edison Lobão that the main hydro plants in the country were in a ‘delicate’ situation, with reservoirs, particularly in the populous and industrialised south and south east of the country, at their lowest levels since 2001. Hydro plants provide about 70% percent of Brazil’s power. The last major blackouts were in 2001, following a previous drought. Pedrosa said the Rousseff government had painted a ‘much more positive scenario’ than feared, although some of the government’s optimism seemed to be founded on long-range weather forecasts projecting rain soon.
- Water shortages are already forcing supply restrictions
Brazil’s main water utility, Companhia de Saneamento Básico do Estado de São Paulo (SABESP), in mid March began limiting the amount of water it supplies to the state of São Paulo, after the federal and state water agencies ordered the company to conserve its primary source by reducing the water drained from the Cantareira reservoir by 15.5%. The Cantareira is the biggest of six reservoirs supplying metropolitan São Paulo, home to 20m people and one of the host cities in the upcoming Fifa World Cup in June and July. On 12 March, Mauricio Tolmasquim, president of the state energy research agency Empresa de Pesquisa Energética (which sits under the energy ministry), said the drought affecting the country since early this year may be worst in 80 years.
- Credit
According to latest data from the local consultancy Tendências Consultoria Integrada (TCI), household credit for 2014 is projected to post its lowest rate of expansion since 2003. Faced with rising interest rates, Brazilian consumers are tightening their belts. The reluctance to spend will not help to accelerate Brazil’s sluggish economy, and suggests that, in an election year, voters are increasingly conscious of the slow-down. Though President Rousseff is still riding high in the opinion polls, Brazil’s unimpressive economic performance provides her opponents with some ammunition.
When adjusted for inflation, the rate of credit growth in 2014 is projected to be 7.8%. In 2013, it was 9.8%, and in 2012 and 2011 it was well over 10%. Between 2004-2011, credit growth averaged 18.7% a year. “After a consumer credit party, this will be a year of moderate growth”, Mariana Oliveira, an economist from the TCI, said. Oliveira attributed the slow-down primarily to banks’ attempts to limit mortgage lending. In 2010, mortgage lending grew by 47%; this year, it is predicted to be 18%. Following the rise in the Selic, real estate loans rose on average 0.6% in 2013, reaching 36%. According to Oliveira, that figure is set to rise to 39.6% in 2014.
The banks themselves, however, have a different explanation for the tightening in consumer credit. José Ramos Rocha Neto, the head of loans and financing at Bradesco, says the rise in the Selic has a marginal impact on consumers. Instead, he argues that Brazilians are merely becoming cannier. “That behaviour of six years ago, when the consumer was happy to rack up credit, has diminished. He is more aware”, he said. Rocha said banks were responding by trying to reduce their consumers’ personal indebtedness by switching them to cheaper lines of credit.
Nicola Tingas, the chief economist of the Associação Nacional das Instituições de Crédito, Financiamento e Investimento (Acrefi), said the Brazilian credit market is maturing. Requests for payment by instalment are also slowing, indicating either reluctance by shopkeepers to extend credit or unwillingness on the part of consumers to commit to expensive purchases.
- Still no real sign of traction
The central bank’s IBC-Br grew a better-than-expected 1.26% month-on-month in January as strong retail sales of items like air conditioners in the hot weather offset most of the sharp downturn in December (-1.4%), the central bank noted on 14 March. It rose just 0.93% year-on-year, however.
The latest (14 March) consensus forecast of local private economists compiled by the central bank for its weekly ‘Focus’ report was unchanged, with a forecast for real annual GDP growth of just 1.7% in 2014, down from 1.8% a month previously. The industrial production forecast was 1.4%, down from 1.9% a month previously. Inflation forecasts were lifted to 6.11%, on higher February results, when the IPCA index was 5.68% year-on-year at the start of the school year.
- Industrial production recovers from low base
Industrial production rose 2.9% month-on-month (m-o-m) in January, recovering from December’s steep 3.7% m-o-m contraction, the worst monthly fall since December 2008. It fell 2.4% year-on-year however, according to the Ibge’s IP index. The Ibge revised down December’s annual result to 2.5%, from an earlier 2.3%. Capital goods output rose 10% m-o-m in January, bouncing back on a low base from a sharp 11.65% m-o-m contraction in December. Within this, automotive sector output rose for the first time in four months (8.7% m-o-m), as collective vacations ended. Consumer goods rose 2. 3% m-o-m and intermediate goods 1.2%. Of the 27 industrial sectors surveyed, 17 expanded in January from December.
- Trade deficit worsens
The industry and trade ministry (Mdic) in mid March reported an accumulated year to date trade deficit of US$5.78bn, on exports of US$39.6bn and imports of US$45.3bn. The trade account tends to be in deficit in the first quarter, ahead of the agri harvest, however the size of the deficit this year has alarmed some private economists. Brazil is facing a combination of global lower commodity prices and problems in Argentina, its main market for manufactured exports. Exports of raw materials fell 8.5% year-on-year in February to US$7.17bn, with semi-manufactured exports down 8.7% and manufactured exports down 9.2%. Meanwhile a weaker Real makes imports more expensive. Fuel imports rose 7.9% year-on-year in February. The Real was trading at R$2.33/US$ on 19 March, from R$2.38/US$ on 2 January. A year ago it was at R$1.98.
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