Bloomberg News

Brazil Said to Mull Budget Cut of Less Than 50 Billion Reais

February 14, 2012

(Updates to add analyst quote in fourth paragraph.)

Feb. 7 (Bloomberg) -- Brazilian policy makers are considering cutting the 2012 budget by less than 50 billion reais ($29 billion), two people familiar with the plan said. The amount is smaller than some local economists expect.

The government is trying to balance the need to contain spending while it increases public investment to spur growth, said the two people, who spoke on condition of anonymity because the proposal must be approved by President Dilma Rousseff.

Finance Minister Guido Mantega said last month the budget cut would be enough to ensure the government would fully meet this year’s fiscal target. The plan, he said, was to keep in place a “solid” fiscal policy to make room for lower interest rates. On Jan. 26, the central bank said there was a high probability it would cut the benchmark interest rate to less than 10 percent from 10.5 percent.

To fully meet its target for a budget surplus before interest payments of 139.8 billion reais, the government would need to reduce the budget by about 60 billion reais, said Roberto Padovani, chief economist at Votorantim Corretora, in a telephone interview from Sao Paulo.

“A smaller budget cut reduces the government’s ability to convince people inflation will converge to target this year,” Padovani said. “The debate over whether Brazil has room to keep interest rates at one digit will only increase.”

Yields on interest rate futures contracts maturing January 2014 pared losses on speculation the budget cut would be smaller than initially expected. The contract, which fell as much as seven basis points earlier today, declined four basis points to 9.94 percent at 4:17 p.m. Brasilia time.

Credit Suisse said in a Feb. 3 report the government would be more likely to meet its fiscal target if it reduced the 2012 budget by 60 billion reais.

The Finance Ministry didn’t immediately return calls and e- mails from Bloomberg News asking for comment.

--With assistance from Andre Soliani in Brasilia. Editor: Harry Maurer, Robert Jameson

To contact the reporter on this story: Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net

To contact the editor responsible for this story: Adriana Arai at aarai1@bloomberg.net


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