Given the commitment of the new economic team in improving the fiscal balance in Brazil, the exit strategy would rely on a higher tax burden, which would hurt growth conditions in the country and lead to markedly low potential growth, which in the medium term would put at risk the investment-grade rating of Brazil.
Last week the economic team announced the reduction of the fiscal targets not only for this year (to 0.15% of GDP, from 1.1%), but also for the next two years (0.7% for 2016 and 1.3% of GDP for 2017, from 2.0%) arguing that lower-than-expected revenues due to the growth recession made it nearly impossible to meet the former targets.
While this is a credible reason for this year, the disappointment with the fiscal measures approved in Congress during the first half of the year, with meaningfully lower benefit reductions, is also to blame. By reducing the primary surplus target up to 2017, the government removes any urgency for the fiscal consolidation, losing an important bargaining point when negotiating with the Congress.
The members of Congress will be even more reticent in discussing and approving unpopular measures of fiscal austerity if the targets are now perceived to be easier to reach.
According to Barclays,
- The fiscal situation increases the risks for the IG rating, adding to the weak growth conditions.
- This decision of the economic team, signals a setback from the strong commitment that it has being showing since late last year.
- Furthermore, it also means that the gross debt will not stabilize anytime soon and actually should increase at a faster pace.
