Brazil's fiscal balance deteriorating despite spending cuts as interest payments rise

The fiscal deficit that stood at 2.3% of GDP in 2012 and 3.1% in 2013 rose to 6.2% in 2014 on the back of growth stagnation. With the economy set to contract very heavily this year, the accumulated fiscal deficit for the first nine months of 2015 was a staggering 9.7% of GDP. The fact that the deficit rose despite a decline in central government spending - the first in four years - makes clear the extent of the challenge to bring the fiscal deficit under control.

While one of the main reasons for the continued surge in the deficit remains low growth in revenue on the back of the contracting economy, the more important and immediate reason is the sharp rise in interest payments. Since the end of 2013, when the fiscal deficit was 3.1% of GDP, the 6.6pp rise in deficit until now has been driven by a 4.7pp rise in interest payments and a 1.9pp decline in the primary surplus.

"Given the shape of the economy is affecting revenue projections and the mounting legislative and political hurdles, it's difficult to see the primary balance improving anytime soon. However, the burden of interest payments is attributable to the monetary policy stance, the risk aversion and the level of the debt itself. While there may be doubts regarding risk perception, the stance of monetary policy and debt levels will continue to keep upward pressure on interest payments over the medium term", notes Societe Generale.