Home' Trinidad and Tobago Guardian : September 10th 2015 Contents SEPTEMBER 10 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
REGIONAL | BG19
When a president has single-figure
approval ratings, faces calls for her
impeachment and has lost control of
her political base, is she in a position
to play hardball with the country s
legislators? Brazilians will soon find
On August 31, President Dilma Rousseff sent Congress a
budget for 2016 with a gaping primary deficit (before interest
payments) of 30.5 billion reais ($8 billion), or 0.5 per cent of
GDP, challenging its members to close the gap.
It was a break with the sound-money practices that have
underpinned Brazil s economy. It was, some critics say, illegal.
Certainly nothing similar has happened since at least 2000,
when Fernando Henrique Cardoso, then the president, trans-
formed public finances.
On a charitable view, Rousseff was shocking legislators into
making hard decisions rather than simply blocking her fiscal
proposals. A harsher reading is that she does not know how
to lead Brazil out of recession.
The markets took that view.
The day after the budget bombshell, the Ibovespa stock
index fell more than two per cent and the currency closed
at 3.7 per dollar, its lowest since December 2002. On September
2, the central bank held steady a key interest rate it had been
raising since last year.
Public finances have already deteriorated this year. Having
originally planned a primary surplus of 1.1 per cent , in July
the government cut that target to just 0.15 per cent , as interest
rates rose and tax receipts fell. The total deficit this year will
be eight to nine per cent of GDP.
In August, Moody s, the ratings agency, cut its assessment
of Brazil by a notch to just above junk status. It hinted at
worse to come by calling the latest news a sign of "the fiscal
challenges that Brazil continues to face."
The risk of a downgrade is one reason for the pessimism
that, some pundits think, is now the prevailing mood in the
corridors of power.
"The government is basically throwing in the towel," said
Alberto Ramos, an economist with Goldman Sachs, an invest-
Rousseff is in a tight corner. She issued her budget after
scrapping a plan to reinstate a tax on financial transactions
that would have brought in 80 billion reais in 2016. She retreated
after her vice president, Michel Temer, rejected the idea and
told her Congress would block it.
Several opposition figures say that, far from finding a way
to make Congress do homework, the president has broken a
fiscal-responsibility law enacted in 2000 as part of an effort
to mend Brazil s finances after decades of chaos. They say
they may take her to court.
On this point, the president may be right. Mansueto Almeida,
an economist who is critical of Rousseff, said that though the
law requires the executive to show how its spending will be
funded, it allows a rise in debt.
Júlio Marcelo de Oliveira, a prosecutor for the Federal Court
of Accounts, agreed that the president, whose alleged budgetary
misdeeds he has previously investigated, acted legally this
Legal or not, the president s move weakens her American-
trained finance minister, Joaquim Levy, who was reported to
have lobbied for further spending cuts and was a reassuring
figure for markets.
Rousseff has consistently failed to hit economic targets since
being elected in 2010, but in the early days she dodged the
political blame. Many people blamed her then finance minister,
Guido Mantega. Replacing him with Levy was supposed to
fix that problem; his loss of face bodes ill.
To restore credibility, Ramos said, the government needs to
end up with a primary surplus of 3-3.5 per cent of GDP.
Simply stabilising the debt-to-GDP radio is not good enough,
he said: It is already too high.
At a minimum, tough horse-trading with Congress looms.
Renan Calheiros, the president of Brazil s Senate who has had
several rows with Rousseff this year, said September 1 he would
not send the budget back to her, as many in the opposition
"It is up to Congress to improve it," he said.
On any fair assessment, Congress shares a lot of blame for
Brazil s economic woes; it neutered many of Levy s better
Is there any way out?
It looks unlikely that tax hikes can be avoided: About 90
per cent of the budget is ring-fenced, leaving little discretion
for spending cuts.
If the government were strong and confident, it might
acknowledge the need for a short-term rise in debt while
seeking ways to limit spending on pensions, health and edu-
cation, and laying out a long-term plan to restore fiscal health.
But pushing such reforms through Congress would take political
will and capital, and this was not done during Brazil s boom
years when it would have been easier.
Now, Almeida said, "We are paying for all of the mistakes
(of) the past five years." The mystery, he added, is why Brazil
has not lost its investment grade already.
@2015 The Economist Newspaper Ltd. Distributed by
the New York Times Syndicate
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