Brazil facing further fiscal deterioration

The Brazilian government has significantly increased its forecast for the primary fiscal deficit for this year, as it is now including the impact of extra funding for measures to support the recovery in flood-hit Rio Grande do Sul state.

The government is now estimating a fiscal deficit of 14.5bn reais (US$2.82bn) for this year, well above the 9.3bn reais forecast previously.

The new forecast would be equivalent to 0.1% of GDP and within the tolerance limit for the year, which is set at 28.8bn reais in the fiscal framework.

The primary deficit or surplus is calculated based on the result of government accounts without including public debt service costs. The fiscal framework adopted for this year allows an annual deficit equal to a maximum of 0.25% of GDP.

Meanwhile, the government has also authorized the release of 2.9bn reais of discretionary spending in the budget that had been blocked in March.

The increase in the projected deficit of the federal government and the release of extra funds come at a time when the authorities are spending heavily to support recovery works in Rio Grande do Sul state, which has been devastated by flooding after heavy rains lasting weeks.

"Expenses related to Rio Grande do Sul may still grow, because it's not yet possible to measure all the impacts caused by the natural disaster, as there are areas of the state that are still flooded," Mário Sérgio Lima, an analyst at Medley Global Advisors, told BNamericas.

"In the coming months we could see an increase in the projections of the fiscal deficit because of the combination of extra spending and also because the record government tax revenue figures seen in the first few months of this year aren't expected to be repeated during the second half of the year because economic activity is slowing," Lima added.

After the year began with better-than-expected economic indicators, in recent weeks economists have made downward revisions to their forecasts for economic growth and are also are projecting that the benchmark Selic interest rate will be higher than previously estimated due to the pressures on government accounts.

According to the most recent weekly central bank survey of 100 economists, Brazil's average expected GDP growth for this year slipped to 2.05% from 2.09% the previous week, while the estimate of the Selic at year-end was also upped to 10% from 9.75%.