By Samantha Pearson in São Paulo
Brazil has promised to cut $18.5bn in public spending, as a former star of emerging markets struggles to win back investors’ trust.
After cancelling his trip to the Group of 20 meeting in Australia this weekend, in order to finalise the country’s fiscal policy, Guido Mantega, Brazil’s finance minister, announced a new primary surplus goal of 1.9 per cent on Thursday.
To meet this target, the government will have to slash R$44bn ($18.5bn) from the budget planned for this year, relying heavily on cuts to discretionary spending in Congress.
While some observers doubt that President Dilma Rousseff will be able to achieve this in an election year, the target was largely welcomed as being more realistic than in the past – a sign of the government’s efforts to improve its credibility.
Faced with the threat of an imminent ratings downgrade in Brazil, Ms Rousseff, a former Marxist guerrilla, has come under growing pressure to make herself and her government more investor-friendly.
Brazil’s currency, the real, strengthened 0.6 per cent against the dollar following the announcement.
“The proof of the pudding is in the eating and it’s going to be challenging to deliver this in an environment of less growth, but it’s more feasible than delivering a large surplus,” said Marcelo Salomon, an economist at Barclays.
Before the announcement, economists had worried that the government would either promise to cut too little from the budget or set such an ambitious savings target that there would be no hope of meeting it, said Mr Salomon.
After impressing global investors with growth of 7.5 per cent in 2010, Brazil’s economy has rapidly decelerated. Central bank data last week indicated that the country entered a recession in the fourth quarter of last year.
However, the government continues to spend like it is 2010, economists say.
Last year, Brazil failed to meet its primary surplus goal, even though it was revised down to 2.3 per cent from 3.1 per cent. The government has also resorted to dubious methods to make ends meet over the past few years, including “creative accounting” and putting pressure on the tax authorities to settle multibillion-dollar back-tax disputes.
But after Standard & Poor’s placed Brazil’s rating on a negative outlook in June last year, the government has been under intense pressure to improve its fiscal policy.
Last month, Ms Rousseff also attended the World Economic Forum in Davos for the first time in an effort to woo business leaders. Two years ago, she shunned the event in favour of a visit to Cuba.
Some economists remain sceptical about Brazil’s ability to meet its more modest fiscal target and win back investors.
The primary budget goal is predicated not only on problematic cuts to discretionary spending but is also based on an overly optimistic estimate of 2.5 per cent growth this year, says Tony Volpon, an economist at Nomura. “We’ve just changed our estimate to 1.3 per cent.”