Brazil government’s reaction to rating downgrade keeps market uncertain?

Brazil's economic team announced cuts in expenditures and new tax measures, aiming at reaching the 0.7% of GDP primary surplus target for 2016. The cut in expenditures is a necessary (but not sufficient) condition imposed by Congress leaders to discuss a higher tax burden. 

The measures, however, do not tackle the main issues of the disequilibrium in the fiscal accounts, which are the constitutional increase in expenditures through income transfer programs and the deficit in the social security system.

"The sources of expenditure cuts will either negatively affect growth further or have a strong pushback in the Congress. This should reduce the probability of voting on measures aimed at higher taxes, probabilities which are already fairly low", says Barclays. 

In addition, the government is proposing the tax over financial transactions (CPMF), during the past month, we have learned that this will not get many votes. 

"If the whole amount of expenditures is approved, it implies a 2.5% reduction in total expenditures in real terms for 2016. Following a 1.7% reduction this year, the cumulative 4.2% proposed reduction in two years looks fairly unrealistic", notes Barclays.

The government's lack of credibility is so low that only announcing measures should not be enough to change the market's mood. Despite the economic team's efforts to revert the uncertainties toward fiscal execution, the risks of approving these changes are very high, given this government's poor political coordination. 

"A deficit of 0.5% of GDP is expected for the public sector fiscal balance", added Barclays.