Brazil: Correcting Its Fiscal Slippage

In a presentation in New York on February 18—his first official visit to the US since his appointment—Brazil’s Finance minister Joaquim Levy said that Brazilians are learning by doing, increasing their level of education while being supported by a constant level of foreign direct investment in the country. He also said that the government is correcting what he called a “fiscal slippage.”

It will take time to see whether or not this will boost Brazil’s record-low levels of productivity and help rebuild some trust in international markets. Rating agencies have given the country a year before they decide whether to maintain Brazil’s investment grade rating—or downgrade the country.

“I am not pretending that you are not worried about the fiscal situation in Brazil,” Levy told an audience of bankers, economists and traders. In 2014, the country had its worst public deficit record, with a primary budget deficit—the first since 2001, when current data collection methods were put into practice—at 0.63% of gross domestic product. Considering the cost of servicing the debt, the country’s overall budget gap doubled in 2014 to 6.7% of GDP, one of the highest among major economies.

Facing the daunting task of convincing the country’s politicians to roll over tax breaks, which more than doubled over the past two years, and reduce social transfers, he said: “I am very confident that we are going to get an adequate level of support by Congress.”

Levy admitted that Brazil is in worse shape than other emerging countries such as Peru, Colombia, India and Turkey—he presented a chart on the increase of Brazil gross debt over GDP—but noted that the country is slightly better off than the average for countries with a BBB rating.

One of the big tests for the new Finance minister will be the approval of controversial reforms to slash unemployment and pension benefits. Most of his success will depend on his ability to reduce public spending without dampening economic growth. His solution seems to be a boost to infrastructure via private investments and project bonds. Easier said than done, given the little time that Brazil’s government has on its hands.