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Investors concerned about Brazil sending mixed fiscal messages
![Investors concerned about Brazil sending mixed fiscal messages](https://cdnimg.bnamericas.com/AGuQlVnsVQeUGVjJUWayEDanYSeMJlFpVRpfWSqrHyLKuVGDzjlBoXgqOQyeomvD.jpg)
Uncertainty among investors is rising as doubts over the Brazilian government’s commitment to fiscal targets linger.
Shortly after President Luiz Inácio Lula da Silva took office in 2023, the government announced a fiscal framework with a target to eliminate the deficit in 2024, and reaching a surplus of 0.5% in 2025 and 1% in 2026.
The surplus would result from higher revenues and lower expenses, excluding interest payments.
But in an interview for a local TV network, Lula said that his economic team needs to convince him of the real need to cut expenses.
“You are not obligated to set a [fiscal] goal and stick to it if you have more important things to do. This country is very big, this country is very powerful,” said Lula.
“This country has no problem if it is a zero deficit, if it is a 0.1% deficit, if it is a 0.2% deficit. There is no problem for the country. What is important is that this country is growing, that the economy is growing, that employment is growing, that wages are growing.”
Investors are scrutinizing progress toward the fiscal goal because Lula has always been in favor of government spending to boost the economy.
Lula’s comments were leaked to the press before the interview aired, forcing finance minister Fernando Haddad to reaffirm the commitment to balance the budget and to debt reduction. Next week, he is expected to announce a partial budget freeze.
“The budget will possibly be blocked if any expenditure exceeds 2.5% [of growth above inflation]. We need to remember that we have a ceiling that cannot be exceeded, which is 2.5%. So this work is being done to check what will need to be” cut or become contingent, Haddad told local reporters.
"Little by little the government is losing its credibility from the point of view of investors because Lula says he doesn't care about spending control while Haddad says the opposite, that he is committed to spending control," Reginaldo Galhardo, manager of local brokerage Treviso Corretora, told BNamericas.
"Due to this lack of credibility, future interest rates in Brazil remain under upward pressure and do not leave room for the central bank to cut interest rates in the short term, even if current inflation indicators show deceleration," added Galhardo.
On July 22, the government plans to announce the bimonthly report of revenues and expenses and probably the amount to be frozen in this year's budget.
Economists estimate that the government will need to block 30-40bn reais (up to US$7.3bn) to achieve a fiscal balance and that volatility could ensue if the amount is lower.
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