Brazil government, central bank nod to rapidly deteriorating GDP, fiscal position

Brazil's Economy Minister Paulo Guedes attends a session of the Joint Budget Committee in the Chamber of Deputies in Brasilia
Brazil’s Economy Minister Paulo Guedes attends a session of the Joint Budget Committee in the Chamber of Deputies in Brasilia, Brazil May 14, 2019. REUTERS/Adriano Machado

May 14, 2019

By Jamie McGeever and Marcela Ayres

BRASILIA (Reuters) – Brazil’s government and central bank said the country’s economic and fiscal health was deteriorating rapidly, as yet another economic indicator on Tuesday suggested the country may be sliding closer toward recession.

Economy Minister Paulo Guedes said the government would cut its 2019 growth forecast to 1.5% from 2.2%, while minutes from the central bank’s last policy meeting showed policymakers believe the economy may have shrunk in the first quarter.

In some regards, the comments, predictions and policy prescriptions coming out of Brasilia show officials are just catching up with the private sector, which has been far more pessimistic in recent months, particularly on growth.

But they leave no room for doubt about the scale of the challenges facing Latin America’s largest economy. Given the government’s limited room for fiscal maneuver and the central bank’s reluctance to cut rates, they could be increasingly tough to meet.

“Moreover, confidence indexes are still weak due to political uncertainties, which suggests there is no light at the end of the tunnel in the near term,” said Patricia Krause, chief economist at Coface in Sao Paulo. “This only emphasizes the importance of having pension reform approved.”

The new forecast would be in line with the 1.45% average forecast in the central bank’s latest weekly survey of about 100 financial institutions. That was the lowest this year, and could fall further if recent economic indicators are any guide.

Data on Tuesday showed that Brazil’s services sector, which accounts for some 70% of economy activity, shrank by 0.7% in March from February and by 2.3% compared with the same month last year. That was far greater than expected, another indication the economy contracted in the first quarter.

Minutes from the central bank’s May 7-8 policy meeting, when interest rates were again left at a record low 6.50%, showed that policymakers said there was a “relevant probability” that the economy contracted in the first quarter.

Brazil’s economy expanded by 1.1% in 2018 and 2017, and official and private-sector forecasts suggest improvement will be minimal this year.

But Guedes said that if Congress approved the government’s fiscal reforms, most notably the pension reform bill that aims to save the public purse over 1 trillion reais ($252 billion) over the next decade, annual growth would soon return to 2% to 3%.

The government will in the interim seek supplementary funding from the state-run BNDES development bank of 248 billion reais to avoid breaking its golden rule of not issuing debt to meet current expenditure, Guedes said.

Waldery Rodrigues, special secretary to the Economy Ministry, said the revised GDP forecasts would be announced on May 22 when the government publishes its latest bimonthly revenue and spending report. Rodrigues said last week that another freeze on federal spending was likely.

(Reporting by Marcela Ayres; Writing by Jamie McGeever; Editing by Cynthia Osterman and Peter Cooney)

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