Bloomberg News

November Primary Surplus Takes Brazil to 99% of 2011 Goal

December 28, 2011

(Updates yields and real in 13th paragraph.)

Dec. 28 (Bloomberg) -- Brazil’s budget surplus before interest payments narrowed less than expected in November, taking the accumulated surplus for the year to 99 percent of the government’s target.

The primary surplus, which includes federal and local governments as well as state companies, narrowed to 8.2 billion reais ($4.4 billion) from 14 billion reais the month before, the central bank said in a statement distributed today in Brasilia. The median estimate from eight economists surveyed by Bloomberg was for a surplus of 7.1 billion reais.

The central bank’s pledge to slow inflation to its 4.5 percent target by the end of next year assumes that the government will hit its budget targets this year and next. In its quarterly inflation report, published Dec. 22, the central bank said that Brazil is undergoing a process of “fiscal consolidation.”

After interest payments, the budget deficit was 10.2 billion reais in November, compared with 6.3 billion in October.

The central bank expects the budget deficit to narrow to 1.2 percent of gross domestic product in 2012, from an expected 2.5 percent this year, as lower borrowing costs and slowing inflation reduce debt service costs, Tulio Maciel, the bank’s head of economic research, told reporters in Brasilia. The 2012 figure would be the smallest deficit since at least 1995.

‘Optimistic Hypotheses’

If policy makers’ “optimistic hypotheses” do not materialize, the central bank may need to cut short its cycle of interest rate cuts, said Jankiel Santos, chief economist at Espirito Santo Investment Bank in Sao Paulo.

“We don’t think that inflation is going to remain low,” Santos said in a telephone interview. “It limits the room for a very extensive and prolonged easing cycle.”

Santos expects the central bank to cut interest rates 50 basis points at each of its January and March policy meetings, pushing the key rate 10 percent.

Brazil’s debt burden fell to 36.6 percent of GDP in November, from 37.4 percent in October, as a weaker real boosted the value of its dollar assets. The central bank expects it to end the year at 36.6 percent, and to fall to 35.7 percent in 2012, Maciel said.

President Dilma Rousseff’s 2012 budget proposal, presented to congress in July, targets a budget surplus before interest payments of 139.8 billion reais for the federal, state and local governments, up from 127.9 billion reais this year. The primary surplus was 126.8 billion reais in the year through November, the central bank said.

Weaker Real

The real weakened 5 percent against the dollar in November, the most among seven major Latin American currencies tracked by Bloomberg. A weaker real increases the value of Brazil’s dollar- denominated assets in local currency. Brazil is a net creditor in dollars.

Central bank President Alexandre Tombini and Finance Minister Guido Mantega have repeatedly said that Brazil should try to keep spending under control even if the world economy deteriorates.

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, fell four basis points, or 0.04 percentage point, to 10.06 percent at 11.41 a.m. New York time. The real weakened 1.2 percent to 1.8822 per dollar.

The central bank began cutting borrowing costs in August to protect Brazil from the European debt crisis. The European Central Bank, Australia, Denmark and Norway all cut rates this month.

Annual inflation in Brazil slowed for a second straight month in November, reaching 6.64 percent, in line with the central bank’s forecast that inflation peaked in the third quarter. Price growth has exceeded the upper limit of the target range since April. The central bank targets consumer inflation of 4.5 percent, plus or minus two percentage points.

Traders are wagering that Tombini will cut the benchmark Selic rate by 50 basis points to 10.5 percent in January, and to 10 percent by May, according to Bloomberg estimates based on interest rate futures yields.

--Editors: Harry Maurer, Philip Sanders

To contact the reporter on this story: Matthew Bristow in Brasilia at

To contact the editor responsible for this story: Joshua Goodman in Rio de Janeiro at

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