Brazil Delivers First-Ever Budget With Primary Deficit

Brazil's first-ever budget with a primary deficit was delivered Monday, after the government abandoned plans to bridge the shortfall by reintroducing an unpopular levy on financial transactions.



The real slumped to a new low of 3.68 against the dollar just before 11 a.m. in Sao Paulo (GMT1400) on expectations of the budget deficit, before rallying to 3.63 reais by 5 p.m. The Sao Paulo-based Bovespa stock exchange also slid more than 3 percent by 11 a.m., before paring losses to around 1.1 percent by 5 p.m.



Markets fear Brazil could be stripped of its investment-grade credit rating next year if it encounters a primary budget deficit -- where spending outstrips income before interest payments -- particularly after the government's decision in July to cut its 2016 primary budget surplus target from 2 percent of gross domestic product to 0.7 percent.



The government had until Monday to deliver the 2016 Federal Budget to Congress.



Alongside Finance Minister Joaquim Levy, Planning Minister Nelson Barbosa announced there would be a deficit of $8.4 billion (30.5 billion reais) for the 2016 budget.



"Despite efforts by the government, it was not possible to reach the primary surplus target for 2016," Barbosa told a press conference in Brasilia, announcing a number of measures aimed at increasing government revenues, including revised tax regimes on a number of items, including computers, tablets and smartphones, and credit operations with the Brazilian Development Bank, or BNDES.



Barbosa said the government remained "open to negotiate with Congress steps to eliminate the deficit," which which he emphasized would be "temporary", but opposition leader Aecio Neves, President Dilma Rousseff's main rival in the 2014 presidential elections, said the deficit "definitively attested to this government's incompetence".



Vice President Michel Temer told reporters in Sao Paulo earlier Monday that the government's economic team had opted to hand Congress a "transparent, realistic budget" to show there was no "make-up" being applied to the government's accounts.



"A budget with a deficit is an extremely troubling thing, but it is being done this way, first and foremost, to demonstrate political transparency on budgetary affairs," Temer was "ed by local media. 



The vice president has defended plans to cut government spending but opposed the reintroduction of the CPMF tax -- a 0.38 percent levy on financial transactions abolished in 2007 -- which he said society would not accept. Instead, he urged politicians to back initiatives that would bridge the gap.



The government's opposition to the CPMF levy came as another blow to Levy who defended its reintroduction as one way to help avoid a budgetary deficit, alongside multi-billion-dollar austerity measures.



Political infighting between the government and the lower house has resulted in other attempts by the government to boost revenues watered down. Rousseff has also faced stiff opposition to austerity plans from members of her own leftist Workers' Party, the PT.



Monday's budget was based on government predictions of economic growth in 2016 of 0.2 percent, which contrasted starkly to forecasts published earlier Monday in a weekly Central Bank survey of more than 100 economic institutions, which predicted a contraction of 0.40 percent.



The survey also brought a seventh consecutive cut in forecasts for 2015, now predicting the Brazilian economy will contract by 2.26 percent in 2015. If confirmed, it would be the worst result in 25 years. 



Inflation forecasts improved slightly to 9.28 percent from 9.29 percent -- although it would still be the fastest annualized rate of inflation in Brazil in the past 12 years. 



The budget also laid out expectations of inflation in 2016 of 5.4 percent, diverging only slightly on the 5.51 percent predicted by economists surveyed by the central bank. - Sao Paulo