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It has been a tough year for emerging economies. Lately, China has been hit by a huge stock market storm, experiencing a loss of 40% since peaking in June (the largest drop since 2008). Questions about its economic health have been raised, given the government reaction with panicked interventions. This was a terrible year for Russia too, whose GDP is expected to shrink due to the collapse of oil-prices. Not a memorable year also for South Africa, which, similarly to other commodity exporters, struggles to find foreigners to fund its current-account deficit. BRICS currencies are tumbling down all around the world. Likewise, Brazil is not immune to all of these emerging markets afflictions.

Figure 1: Brazil GDP annual growth. Data from tradingeconomics.com

The GDP of the Latin-American country is expected to record a 2.3% contraction this year, due to a long period of weak economic policy and of fading commodity markets worldwide. On top of that, the large investigations into the corruption scandal that hit Petrobras, the state–owned oil company, is alarming. Unemployment rate is dramatically rising, from 4.8% in 2014 to 7.0% in 2015, dragging down the economic nightmare household consumption (-2.8%), industrial production (-6.0%) and investments (-11.3%). At the same time, rising inflation and the weakening of BRL (that is forecasted to be reaching 4.0/USD by the end of the year) induce investors to claim for higher yields on government bonds, which in turn lead to an increase in interest payments due from the country, causing an 8-9% deficit of GDP.

Two weeks ago, President Dilma Rousseff sent to Congress a draft budget for 2016, but the market reaction was not positive. The Ibovespa stock index fell over 2% the day after the draft was published. BRL closed at its lowest since December 2002 against all major currencies. On September 9th, the fiscal situation of Brazil was marked by the early decision of Standard & Poor’s to cut its sovereign rating from BBB- to BB+, maintaining a negative outlook. S&P was the first rating agency, in 2008, to boost Brazil to investment grade and the first to downgrade it. However, until Moody’s and Fitch agencies will hold their rating of Brazil as investment grade, international funds will continue investing in government securities.

The reaction of President Rousseff was immediate. She declared to Valor Econômico, Brazil’s leading business and financial newspaper, that the government can hit a primary surplus target of 0.7% of GDP in 2016. On September 14th a new fiscal plan has been presented to reach the consolidated primary fiscal surplus that Rousseff has announced. The new set of measures, 60 billion reais ($16 billion), consists, in details,of 26 billion reais of spending cuts, including pay freeze for some public servants, and in 34 billion reais of tax measures that will target financial transactions.

Figure 2: Costs and revenues summary of the New Fiscal Plan. Data from Banco Central do Brasil

As shown in the table, the tax increases include the reintroduction of CPMF tax on bank account transactions, with a rate of 0.20%, and the raise of income tax on capital gains from 15% to a new percentage in the range of 15% to 30%.

The program also has some implied risks: on the one hand there is the possibility that Congress refuses to reintroduce the CPMF tax, and on the other hand there is the risk that civil servants and left wings group will oppose the several spending cuts.

Unfortunately, like the earlier program stated by the government, the new one may not be sufficient to repair public finances but to antagonize the Congress. The dropping consensus of Ms Roussef and the lack of control over a Congress in which movements against her are stenghtening do not represent a good eventuality for Brazil.


Francesco Rado

Guja Giulia Virgadamo

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