Chinese companies invest in Brazil about half of what they announce

President Michel Temer arrives this Thursday in Beijing for a visit where there is great expectation of announcements of new Chinese investments in Brazil. The question is what will be new and how much will actually materialize.

Data from the China-Brazil Business Council (CBBC) show that $80 billion in Chinese investments in Brazil were announced between 2010 and 2016. But only $45.4 billion were confirmed — that is, little more than half (56.8%).

Following a conference Wednesday at a hotel in Beijing, the CBBC president, Ambassador Luiz Augusto de Castro Neves, minimized the difference in the figures.

“This is nothing serious, nobody in the business takes investment announcements seriously, because what you really look at is the confirmation,” he said. “There are cases in which a company didn’t make an announcement, and made concrete investments, for example.”

The executive director of the Center of Brazilian Studies at the Chinese Academy of Social Sciences, Zhou Zhiwei, gives two explanations.

First, he points out that there are Chinese companies that have made public their interest in investing in the Brazilian economy but, after taking a more in-depth prospecting trip, end up thinking that Brazil costs are too high and may even decide to invest in another country in the region. This is rare, but it happens. He cites as an example the carmaker Chery, which transferred its factory from Brazil to Uruguay.

The other reason for the difference between intentions and an actual project is that certain companies truly have long-term plans and reckon the right moment has not yet arrived.

What is undeniable is that Chinese investments in the Brazilian market gathered momentum in the first half of this year, despite the country’s political uncertainties. Roberto Fendt, executive secretary at CBBC, estimates that the total confirmed was $6.1 billion.

“Every day there’s news of more Chinese investments in Brazil,” Mr. Zhou confirms. For him, this is normal because the Chinese arrived late to the largest economy in Latin America. This year, the Chinese mainly carried out acquisitions of Brazilian companies, taking advantage of the fact that assets are cheap.

In the future, Mr. Zhou believes, Chinese companies may seek joint ventures with Brazilian manufacturers of several products. “The Chinese may help improve the competitiveness of Brazilian manufacturers,” he says.

China is an increasingly important source of capital for Brazil. Petrobras is negotiating a new loan of about $1 billion from the Exim Bank of China. The China Development Bank, meanwhile, had $25.3 billion in outstanding loans to Brazil as of the end of the first half, in sectors including oil and gas, mining, power, telecommunications, and others. The bank’s entire portfolio of international loans total $274 billion. About $60 billion were extended to Latin American countries.

Source: Valor Econômico

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Prosecutor general to charge Temer with two crimes

After some back-and-forth, the Office of the Prosecutor General (PGR) decided to combine in a single charge the accusations of obstruction of justice and criminal organization against President Michel Temer. The piece is likely to be submitted to the Federal Supreme Court (STF) after the Independence holiday (September 7), that is, in the last week of Rodrigo Janot ahead of the body. He hands the post over to his successor, Raquel Dodge, on September 18.

Finishing the charges still depends on the inclusion of accusations made by currency dealer Lúcio Funaro, who last week signed a plea bargain agreement with the PGR. According to Valor  Mr. Funaro implicated Mr. Temer both in the crimes of obstruction of justice and of criminal organization. Allies of the president were also implicated by Mr. Funaro.

Investigators following the negotiations with Mr. Funaro assure he brought “heavy” charges against the president and his closest allies. At the Palácio do Planalto, the presidential office, the expectation is exactly the opposite. Aides to Mr. Temer — who will spend ten days outside of Brazil — bet the charge will be a “festival of inferences.”

For Mr. Funaro’s deposition to be part of the charge, the PGR expects his plea bargain to be certified by Justice Edson Fachin, who handles cases related to Operation Car Wash at the Supreme Court. Mr. Fachin has already received the terms of the agreement, but has not yet made any manifestation. The certification doesn’t depend on the content of the deposition, but only on its legality, regularity and spontaneity.

In addition to staying in prison for some more time, Mr. Funaro accepted paying a fine of a few million reais and be permanently barred from any activity linked to the financial market, which was where he began his career.

Until recently, Mr. Janot considered the possibility of filing two charges against the president. With his tenure ahead of the PGR approaching its end, however, he decided to include the two accusations in the same piece. Splitting the charges was considered by the president’s allies as a political action of Mr. Janot. In June, Mr. Temer was charged with passive corruption, but the floor of the Chamber of Deputies didn’t authorize the STF to prosecute the president. If the charge were accepted by the legislators, Mr. Temer would have to step aside for 180 days.

The presentation of the charge is likely to be Mr. Janot’s last big act of his four-year tenure as prosecutor general. Before that, he will still have to deal with pending cases such as the plea bargains of executives of engineering groups OAS and Queiroz Galvão. There was also expectation that a plea bargain was cancelled for lack of evidence, but the situation changed and the agreement may be maintained.

After he hands his post to his successor, Mr. Janot will take a 30-day vacation. Upon returning, he takes back his chair of deputy prosecutor general, being responsible for cases at the Superior Court of Justice (STJ).

He still doesn’t know in which area he will act, but has already manifested preference for cases of criminal law. A resolution of the Superior Council of the Federal Ministry says it is up to the prosecutor general to designate the areas for which each deputy prosecutor general will be allocated. The preferences of each and the criterion of seniority will be considered.

Source: Valor Econômico

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Brazil government fires back at activists, supermodel on Amazon decree

Brazil’s government defended the opening of a vast Amazon area to mining on Friday after criticism from lawmakers, environmental groups and supermodel Gisele Bundchen that it threatened the world’s largest rainforest.

Earlier this week, President Michel Temer abolished the National Reserve of Copper and Associates (Renca) that had protected roughly 17,800 square miles (46,000 square km), an area larger than Denmark, from mining since 1984.

The reserve in northern Amapá and Pará is thought to have significant reserves of copper, gold, iron ore and other minerals. Environmentalists say the area is rich in biodiversity and hosts species yet to be studied.

Mining and Energy Minister Fernando Coelho Filho said the decree could protect the area from illegal mining operations that the government says are polluting waterways, destroying the forest and plundering national wealth.

“In an area that mining is permitted, they must follow the law, period,” Coelho said.

Mining remains off limits in parts of Renca marked as indigenous land or subject to full environmental protection, he said.

If mining is allowed to go forward, it could cause the biggest ever legally sanctioned destruction of the Amazon, Randolfe Rodrigues, a senator from Amapá state, told Reuters.

Temer’s office issued a statement late Thursday saying these concerns were overstated and allowing legal mining there would help combat illegal exploration.

“Renca is not a paradise, as some would wrongly like to make it appear,” the statement said.

Rodrigues, of the opposition Rede party led by former presidential candidate and environment minister Marina Silva, has proposed a measure in the Senate to block the president’s decree. He plans to file lawsuits in Amapá and Pará states to block the decree.

“Shame! They are auctioning our Amazon! We cannot destroy protected areas for private interests,” Bundchen wrote in a tweet.

In June, Temer said in a tweet to the model he would veto a measure to separately reduce protections of a different national forest after she criticized the move. He later supported a compromise to reduce the protected area by a lesser amount than originally proposed.

According to a 2010 government report, 69 percent of the Renca area in Amapá state is subject to other types of protections.

Merely allowing mining near protected areas could generate conflict and put them under threat, WWF and Greenpeace said in statements.

“The measure will accelerate the arrival of infrastructure and people for mining activities in areas of native forest, reproducing in the region the same lack of governance that permits the advance of deforestation and land grabs (elsewhere) in the Amazon,” Greenpeace said.

Source: Reuters

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Petrobras wants Eletrobras proceeds to cover R$16bn debt

Petrobras hopes to enshrine in law its priority on the proceeds from eliminating quotas on Eletrobras-operated hydropower dams. The state-owned petroleum producer sent the Mines and Energy Ministry an official letter stating that it is straining under debts of billions of reais, and from “persistent delinquency” in fuel-supply contracts with thermal plants. Petrobras is demanding the inclusion of an article in a planned provisional measure (MP) reforming industry rules that would put its interests ahead of other plans for federal revenue from the new concessions.

Petrobras’s request clashes with the economic team’s hope of channeling the proceeds from ending the quota system into plugging the 2018 budget gap. Officials want to sell in the market part of the government’s Eletrobras shares and turn its control over to the private sector, generating enough cash to pay for the concession of 14 hydroelectric dams currently operated under the quota system. The plants would get a new 30-year contract under market-rate tariffs.

This accounting arrangement would allow the National Treasury to use privatization proceeds for any finality, including paying current expenditures. Informal estimates put the potential revenues from re-auctioning the new plants at R$30 billion.

Eletrobras already owes Petrobras – including invoices from unit BR Distribuidora – over R$16 billion. “Considering the potential proceeds from ending the quota system and chronic debt problems related to fuel supplies in the North Region of the country, Petrobras understands that directing the proceeds toward covering existing debts from fuel contracts is the best solution to sanitize and reduce litigation in the electric sector,” Petrobras’s regulatory director, Dean William Carmeis, wrote in the letter.

The letter, which was forwarded to a public hearing on the MP, begins by recalling a government promise to hand over to Petrobras up to R$3.5 billion from the initial concession bonuses of 29 hydroelectric plants in late 2015. The money was never paid and “there is no indication that Petrobras will receive a share of those funds.”

“This context led Petrobras to adopt all available legal measures which, ultimately, could result in halting natural gas supplies to AmE-D [Amazonas Energia Distribuição], threatening power supplies to Manaus, which is far from our interest,” the manager says.

Petrobras wants the government to forward all proceeds from new concessions at market rates to the Energy Development Account (CDE), a sectoral fund that finances subsidies to low-income consumers, including fuel to power systems unconnected to the national grid. Petrobras then wants the CDE to cover “currently and potentially late payments” from fuel oil and natural gas contracts with thermal plants.

The petroleum producer also made another suggestion which, although it doesn’t exclude the demanded cut of concession payment, involves transferring Eletrobras assets to Petrobras. The minister of Mines and Energy, Fernando Coelho Filho, had already admitted the possibility.

Reckoning that Eletrobras can’t pay the debt and Petrobras can’t forgive it, Mr. Coelho Filho mentioned the possibility of forfeiting assets like thermal plant Mauá 3. The 570-megawatt plant was inaugurated last year and belongs to Amazonas Energia, and is fueled by natural gas from the Urucu Basin.

“Another possibility for the payment of that debt in part or fully would be the federal government, as controlling shareholder of Eletrobras, having the prerogative to order the transfer to Petrobras of generation ventures granted to the Eletrobras System companies in exchange for discounting or canceling fuel supply debts,” the state-owned company said in the letter sent during the public hearing period.

Source: Valor Econômico

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Brazilian mint’s figures show profits

After the government announced plans to privatize Casa da Moeda do Brasil, the Brazilian mint, alleging recurring losses, figures of the state-owned company showed it actually had successive surpluses in recent years.
The company has in fact been posting lower earnings since 2016 and is likely to be in the red this year — but it says it expects to reverse that loss already in 2018. “If the government wants to study [privatization], it is a valid strategic decision. But we are doing our homework,” the president of Casa da Moeda, Alexandre Borges Cabral.

He said financial difficulties began in 2016, specifically because of problems such as the DRU provision that allowed the government to have discretionary control over a larger portion of the budget, reducing revenues by more than R$500 million. Additionally, a change in the system that monitors the beverage industry reduced the state-owned company’s revenues.

The company’s financial statements show it had a surplus of more than R$300 million in 2015, which fell to R$60 million in 2016 — a drop of approximately 80%. It says that in 2017 the projected deficit will be covered by its own funds, without the need of a capital injection by the Treasury.

Next year, Mr. Cabral expects the company to return to the black thanks to measures that cut expenses by as much as R$14.1 million per year, such as extinguishing three divisions, 28 administrative sections, and 99 posts not filled through competitive exam. Moreover, Casa da Moeda will implement a voluntary layoff program expected to produce savings of R$55 million per year starting in 2018.

To increase revenues, the company says that different projects are underway to “expand the sale of existing products, in addition to developing new products such as the new beverage control and tracking system” — slated to begin operating in 2018. “I believe it is not the fact of being a private-sector or state company that makes [management] efficient or not, it depends on the work of people. But [privatization] is a government decision,” Mr. Cabral said.

Nominated by the Brazilian Labor Party (PTB), the Casa da Moeda president is a career employee of Banco do Nordeste, a regional development bank, and took the helm at the Brazilian mint after President Michel Temer took office. He was the third person to lead the company in 2016 and in this troubled year, where a lack of equipment created problems in the printing of passports.

Casa da Moeda’s figures contrast with the version released Wednesday by the Palácio do Planalto, which stated that the company was having repeated losses. The minister of the Secretariat-General of the Presidency, Moreira Franco, said technological advancements and declining demand for paper bills and coins have been causing “successive” losses to the company.

When contacted about the contrast between Mr. Franco’s comments and the numbers, the minister’s press office said his statement about “successive” losses were meant to highlight the drop in earnings in 2016 and the 2017 deficit. “The drastic reduction in profits between 2015 and 2016, as well as the deficit that Casa da Moeda will have in 2017, do in fact represent successive losses.”

“The sale of assets by the federal government intends to offer better services to Brazilians, as well as promoting jobs and income in the country,” the press office’s note added.

The Ministry of Finance acknowledges that Casa da Moeda, which it oversees, had profit in prior years. But what worries them is the situation going forward. According to the ministry, the main source of revenue was the System of Control of Beverage Production (Sicobe), which was suspended for being too costly for the industry. Moreover, the ministry adds, the Central Bank was recently authorized by law to import paper money and coins, which reduces the state company’s prospect for revenue. “There is a relevant risk of Casa da Moeda becoming a state company dependent on Treasury money,” the ministry says in a note.

Fabiano Jantalia, legislative consultant of the Chamber of Deputies who produced a study on the mechanism of money fabrication around the world, says the privatization has precedents in international practices. “I don’t see it as any kind of purely local solution,” he said. He added there might be “very strong” interest from companies in Casa da Moeda. “There are strong international players in this segment,” he said.

Source: Valor Econômico

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Privatization is good, but thinking only about the cash is dangerous

High school textbooks tend to simplify contemporary history, sticking to what is really important to tell young students. A few decades from now, when it becomes necessary to give a rundown of the FHC-Lula-Rousseff-Temer eras in two or three chapters, perhaps there will be not enough lines to describe the privatization of key sectors of Brazil’s infrastructure.

But it might go something like this: in the 1990s, facing the need to stabilize the economy after years of hyperinflation and sky-high interest rates, the Fernando Henrique Cardoso administration sold precious assets and used the proceeds to minimally curb the booming public debt.

FHC got some things right and others wrong. No one disputes the success of the privatization of telecom companies. As for the sale of railway operator Rede Ferroviária Federal (RFFSA), done in a hurry to avoid new losses and raise some cash, it left a legacy of insurmountable regulatory problems. Suffice it to say that more than 60% of Brazil’s rail network is now completely abandoned. Railways aren’t expanding, and concessionaires charge only a little less than truck freight prices, at the limit of what they can do.

Ideological biases aside, Luiz Inácio Lula da Silva didn’t need to privatize anything. He rode the super-cycle of commodities and managed to reap the fruits of a healthy formalization of the economy, with full employment and growth in tax revenues. Why deal with labor unions and the Workers’ Party (PT) clientele if we were living the illusion of easy growth and the megalomania of state investments?

With Dilma Rousseff, iron ore and soybean prices plunged and the economy ran out of steam, but she clung to power as long as she didn’t radicalize her fiscal maneuvers. To get re-elected, she took her strategy to the limit, “pedaling” expenses into the future to create the sensation of heat from economic growth that no longer matched the temperature far from the furnace. Everybody knows how that turned out.

In infrastructure, admitting that the state had neither the money nor the agility to handle big projects, Ms. Rousseff swapped out the Growth Acceleration Program (PAC) for the Logistics Investment Program (PIL). She accepted private-sector investment, but never wholeheartedly. The result: a concession plan with poorly designed contracts, a plan to double highway lanes in five years that never got off the drawing board, a weird model for new railways that elicited the market’s wrath. At least because of the World Cup and the Olympics, we got airports that make us feel like we were in the first world, with cool stores, well-lit corridors, boarding planes and disembarking without the annoying buses. That the winning concessionaires in the auctions offered crazy premiums and are now at risk of collapse is mere detail.

Michel Temer swapped the PIL for the PPI — cursed alphabet soup! – creating an Investments Partnerships Program task force to coordinate privatizations, and he believes heart and soul in the role of private capital in infrastructure. The market loves it and applauds. “But we lost our reasonableness, to discuss everything under the prism of fiscal necessities,” laments a government official who, previously excited about the new concessions, now sees enormous pressure from the economic team to sell everything possible. He jokes that the Palácio do Planalto now only thinks of three things: generating cash, generating cash, and generating cash…

You can’t rush perfection, the saying goes. Auctioning off São Paulo’s Congonhas airport? Great. There will be plenty of potential buyers. The terminal will look prettier. Operating conditions will improve. Hardly anyone knows that airlines leave airplanes parked on the apron to deal with unforeseen events and avoid being punished for not meeting schedules. Private-sector management can certainly help. But what about passengers in Rio Branco, Campo Grande, or Teresina? Do they get an Infraero in tatters and without the cash to carry out basic duties? You sell the filet mignon, plug a little of the fiscal gap, and leave the bone to the state, without thinking about regulations.

Privatizing Eletrobras is a good idea. We’ve had enough of deputies appointing the chief executive of Chesf, and senators giving orders at Furnas. But there is one irksome question: is it really okay for a hydroelectric dam built at the beginning of the past century, and fully amortized, to charge more per megawatt-hour than new dams like Belo Monte or Jirau? Taking the dams out of the quota system means, in practice, more or less that. You solve the dilemma by blaming Ms. Rousseff, and that’s that. But wouldn’t that be bequeathing to the next generation the mistakes made during the privatization of RFFSA, in the 1990s, because – after all – we need to find a way of plugging the 2018 hole? The answer doesn’t fit in a high school history book.

Source: Valor Econômico

 

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Central Bank director sees credit firming up

Having contracted sharply for two and a half years, the credit market is showing more consistent signs that the worst is over and a recovery may be in sight. In practically all types, loan originations and delinquency stabilized or give signs of improvement, leaving the financial system more prone to extending credit when the economy is attempting a revival amid falling interest rates and consumer deleveraging.

“In general, the credit market is showing signs of some improvement and this involves practically all types. Delinquency stopped growing, lending stopped falling,” says Anthero Meirelles, the deputy governor of supervision of the Central Bank (BC), in an interview.

Mr. Meirelles will step down in the next few weeks after ten years on the board of governors. He was ahead of the departments of administration (2007-2011), regulation (February to April 2015) and supervision (2011-2017). “This recovery from the prior month is always something we have to watch with some caution, but when we notice some reaction in several types of loans we can imagine that the recovery may gain consistency,” he says.

One of the monetary policy’s main transmission channels is credit. And the Selic policy interest rate has already been cut to 9.25% from 14.25%, with further cuts on the way — the market is forecasting a 7.5% rate by the year’s end. Real rates, if deducting the projected inflation, are between 3.2% and 3.5%.

With the monetary easing, the trend is for growth both in demand and supply of credit. And the financial system is well-positioned to serve such process.

“There was a cleanup of portfolios, total credit fell, even as proportion of GDP. Banks have carried out this process of cleanup and materialization of losses, maintaining good levels of capitalization, provision [for nonperforming loans] and liquidity. The environment, in this aspect, is conducive to the recovery,” Mr. Meirelles says.

The purge of credit portfolios is illustrated not only by the good behavior of delinquency, but also by the dynamic of the so-called troubled assets, broader concept that in addition to nonperforming loans considers restructured debt, plus the lowest-quality debt, rated between E and H, which demand more provision by the banks.

In the Financial Stability Report (REF) of December 2016, troubled assets were about 8% of total credit outstanding, reaching 8.3% of corporate loans, the highest level on record (since 2012) and almost twice the level of 2014. In the case of individuals, this ratio was at 7.3%, the highest since 2013. Yet more recent analyses, considering data of the financial system as of June, suggest it stopped worsening and giving signs of reversal.

This cleanup reduces the need of provisions, which continue around 6.9% of credit outstanding, the highest since the end of 2009, and increases the willingness of banks to lend, as they tend to pass on to borrowers the lower funding cost caused by the current monetary easing.

Mr. Meirelles says the behavior of delinquency must be seen the following way: delinquency rates were rising in the past both because credit was not growing and because defaults themselves were increasing. That is, the denominator was constant or falling and the net past-due loans increasing. Now, we are seeing some recovery of credit, the denominator, and in the case the numerator, which is the delinquency, is falling or stopping growing.

Mr. Meirelles also says that past-due loans are falling for two reasons. The debts that were defaulted and were not recovered were written off, ceasing to be nonperforming loans. And the flow of new defaults is diminishing.

Such trend reflects the greater selectiveness of banks in lending seen since 2010/2011. Moreover, the high delinquency rates of 2015 and 2016 were related to credit extended at moments of more euphoria and laxer criteria.

The trend taking shape is of lower delinquency. Data suggest credit portfolios have been greatly cleaned up amid an uncommon contraction cycle, with two years of sharp GDP drop.

“Now, the dynamic of this process will depend on the recovery itself. If the recovery is stronger, this movement accelerates, because companies gain capacity to honor their debts. So this virtuous cycle tends to be intensified. Evidently, if the recovery lags, it will be slower,” Mr. Meirelles says.

Elaborating on the assessment, Mr. Meirelles points out that consumer credit was already stabilizing for some time and that now credit to businesses stopped worsening and shows signs of improvement, but still marginal. The only segment not showing reaction is the credit to investment.

On the side of defaults, businesses seem to have left behind the big bankruptcy filings of the last two years, but the data are still negative. In the case of small and medium-sized companies, the pace of deterioration begins stabilizing.

Bankruptcy filings are another indicator of possible market improvement. Figures of credit bureau Serasa show that between 2012 and 2014 the number was around 800, rose above 1,200 in 2015 and 1,800 in 2016. It continues high now in 2017, but not so much. In the first half, there were 685 filings, down 25.8% year-over-year.

 

Source: Valor Econômico

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Brazil to swap environmental fines for recovery works

Brazil will allow environmental transgressors to exchange millionaire fines for recovery works at a discount, the environment minister said on August 17, in a bid to reduce litigation and raise funds for projects in times of austerity.

A decree to be published next week will allow environmental offenders such as oil company Petrobras to swap their fines for investments in projects, with a discount of up to 60 percent of the original penalty, minister José Sarney Filho said.

From the 23 billion reais ($7.24 billion) in environmental fines imposed between 2011 and 2016, federal agency Ibama has received just 605 million reais as most transgressors appealed against the penalties in courts, ministry data shows.

State-run oil producer Petróleo Brasileiro SA, as Petrobras is formally known, is expected to be one of the first companies applying for the swap, Sarney Filho said. Petrobras could cut its debt with Ibama to about 380 million reais from 950 million if the full discount is applied.

Ibama expects about 4.6 billion reais in investments under the new rules. Brazil’s government has frozen about 45 billion reais in spending this year in order to meet its budget target.

Sarney Filho said the swap will not be available for cases such as the 2015 Samarco disaster, in which the deadly collapse of a tailings dam owned by the mining company killed 19 people, destroyed a village and polluted an interstate river.

Source: Reuters Brazil

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Government pushes fiscal adjustment to next president

With its new fiscal target for 2017, the government will be able to raise its spending by R$8 billion to R$10 billion, Planning Minister Dyogo de Oliveira announced on August 16. The primary budget deficit projected for this year could therefore be smaller if the government maintained the spending freeze at the level set in the latest budgetary and financial programming decree, issued by President Michel Temer on July 28.

Yet the government decided to have some room to increase its spending as some services to citizens are under threat of being halted or become precarious in this second half, because of the cuts.

Discretionary expenditures in the 12 months through June were at the level of 2010. That is, the cut was big. But its impact on the fiscal result was very small.

By defining a primary-deficit target a little worse in order to accommodate a spending increase, the government gave two important indications. In the case of discretionary expenditures, which are basically the spending on maintaining the machinery of government (but don’t include spending on personnel or with healthcare and education) and on investments, the government considers it has cut as much as it could, and going beyond that is not possible without compromising the provision of public services.

Therefore, the government concluded, albeit belatedly, that it is not possible to make the necessary cut to balance its accounts only on discretionary expenditures, unlike what business sectors and some private economists advocated in the beginning of the Michel Temer administration.

The expenditures that are growing are mandatory and, to reduce them, it is necessary to change the legislation and even the Constitution, which is much more difficult.

The new fiscal targets also suggest that the burden of the fiscal adjustment was pushed to the next administration, which will be elected in October of next year. The primary deficit set for the central government (Treasury, Central Bank and Social Security) this year is equal, in nominal terms, to the shortfall in 2016, of R$159 billion. The same amount was maintained for 2018. However, there will be reduction in relation to the GDP if the economy grows as expected.

It is the next government who will have to turn a R$159 billion primary deficit, which it will inherit from the Temer administration, into a primary surplus over its four years. It is not possible to anticipate, obviously, what the future president will do to reverse such a dramatic fiscal situation.

Since it is impossible to increase the cut of discretionary expenditures, according to the Temer administration, the new president will have to propose cuts in mandatory expenditures. But since it takes longer to reduce such spending, everything suggests that substantial part of the fiscal adjustment will be made by increasing revenues, probably by raising the tax burden.

According to the announcement, the central government will still have a primary deficit in 2020, of R$65 billion, something like 0.8% of GDP. That is, the federal government will have a substantial primary deficit for the seventh year in a row. It is not yet possible to know when public accounts will have their first surplus because everything depends on the decisions to be taken by the next administration.

It is hard to believe that the future president will be able to reverse a primary deficit higher than 2% of GDP he or she will inherit from the Temer administration into a primary surplus in the first three years in office. That is, to post a primary surplus already in 2021. Even with the recovery of the economy and, consequently, of tax receipts.

The fact is that the public debt will increase greatly because of the new programming of fiscal targets released on August 16. The government simply increased the expected deficit for this and the next three years. With the changes, the central government’s primary deficit was increased, in cumulative terms through 2020, by R$199 billion — this is the increase of public debt that will occur in the period. If the deficit increases, the government needs to borrow more on the market to finance itself, increasing its debt.

The new official projection for the gross public debt as proportion of GDP until 2020 has not yet been released. Before the target changes, it was that the debt would reach 77.7% of GDP in 2020. With the new targets, it will certainly surpass 80% of GDP.

 

Source: Valor Econômico

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Government now forecasts primary deficit through 2020

After two delays and a series of information mix-ups, the government finally decided to announce new fiscal targets for this and for the next year, also presenting a scenario in which Brazil will not have a primary budget surplus until 2020. Its goal in 2017 went from a deficit of R$139 billion to R$159 billion, same figure it will pursue in 2018, replacing the target of R$129 billion set in April. For 2019, first year of the next administration, the estimate is of a R$137.8 billion deficit, and for 2020, which was supposed to have the first surplus since 2013, the projection now is of a R$65 billion shortfall.

With the new targets, the economic team also announced a package of measures to enable the accomplishment of 2018’s goal, by increasing revenues and curbing government spending, as well as the second-largest group of mandatory expenditures, without having to resort to new target revisions.

The initiatives include changes in the form of taxation of exclusive funds, suspension of the increase of Reintegra, a tax benefit to exporters, rollback of payroll-tax cuts and collection of social-security contribution of 14% for people earning more than R$5,000 a month.

The change in taxation of exclusive funds, which are closed to the public and serve high-income investors, is in the system of collection, without alteration of the rates, which vary from 15% to 22.5%, according to the duration of the investment. Before, Finance Minister Henrique Meirelles said, these funds only had to pay taxes at the close of transactions. Now the collection will be made annually, as is common in the traditional fund industry. “As the taxation of exclusive funds becomes the same of open-end mutual funds, we have and advance of revenue and this advance is therefore of R$6 billion,” Mr. Meirelles said.

These measures together represent R$14.5 billion in additional revenues, and with the increase in the expected deficit next year by R$30 billion complete the fiscal shortfall of R$44.5 billion found in relation to the Budgetary Guidelines Law (LDO) still in effect. The government also reduced its projection for the minimum wage next year to R$969 from R$979 a month, something that produces savings especially for Social Security.

This year’s fiscal-target revision owed to the difficulty that the government has to produce revenues, result of a slow recovery of economic activity, of falling inflation and of expected extra revenues not materializing, such as the rollback of payroll-tax cuts, the second round of legalization of unreported assets held by Brazilians abroad and the risks involving some possible revenues, like the new Refis, a program for settlement of tax debts, which was expected to raise R$13 billion.

For 2018, the change is because of the difficulty in forecasting sufficient revenues to meet the target, even with the spending cap fully working. Factors such as the lower forecast of GDP growth, to 2% from 2.5%, and the lower inflation, which is likely to generate R$23 billion less to the government in 2018 (compared with R$19 billion in projected losses for 2017).

The government has also announced a program of reforming the state with measures that basically affect public servants, such as the postponement of raises to civil servants (military were preserved), whose expected impact is R$5.1 billion, effective implementation of the compensation cap of the Federal Supreme Court (STF), which produces gains of R$725 million, canceling of salary raises to workers appointed by politicians, reduction of perks, in addition to the extinction of 60,000 vacant posts, which don’t have direct impact, but reduce the risk of spending increase.

The announcement of the new targets and of the package of measures occurred more than one hour late and was partly first reported by the government leader in the Senate, Romero Jucá (Brazilian Democratic Movement Party, PMDB, of Roraima), who advocated an even bigger deficit as target.

Mr. Meirelles made a point of emphasizing that the decline of the projected revenue for 2017 was caused mainly by lower inflation. “The 2018 change also comes from the drop of expected revenue,” he said, pointing out that inflation expectations have also fallen sharply. “Falling inflation is excellent news for the country, let’s make this very clear,” he added. In his assessment, this deceleration of inflation is reason for optimism to the country and the consumers and good sign for economic activity.

The minister also announced that the change in the deficit target for the central government in 2017 and 2018 also caused adjustments in the targets of the consolidated public sector, which includes states and municipalities.

For 2017, the deficit rises to R$163.1 billion from R$143.1 billion. The expected result of federal state-owned companies and of states and municipalities was kept at deficits of R$3 billion and R$1.1 billion, respectively.

In the case of 2018, the consolidated public sector’s target will be a R$161.3 billion deficit, up from R$131.3 billion. The expected deficit for federal state-owned companies was kept at R$3.5 billion, and for state and municipal government the goal is a R$1.2 billion surplus.

Mr. Meirelles said the forecast of primary revenues in 2017 fell R$42.5 billion from the figure that was in the Annual Budgetary Law (LOA). It went to R$1.38 trillion from R$1.42 trillion. In the case of the administered revenue, the forecast is R$50 billion smaller than in the LOA.

The minister also highlighted that the composition of economic growth, with greater presence of sectors that collect less taxes, such as agriculture and services, with effect accentuated by the recession, has negatively affected the government revenues.

In addition to reducing the projection of real GDP growth, the estimate of nominal GDP, which is what directly affects estimates, fell to R$7.14 trillion from R$7.24 trillion. These figures, Mr. Meirelles said, will be sent to Congress in the annual budget draft of 2018.

 

Source: Valor Econômico

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