Treasury further reduces deferred expenditures

The federal government will spend R$15 billion to R$20 billion in December to further lower the level of deferred expenditures ("restos a pagar"). Officials plan to spend a total of R$73.5 billion this year paying expenditures created in previous years but still not covered. The central government is forecast to post a R$170.5 billion deficit, as targeted by the Treasury, the Central Bank and the Social Security prgram. “We spent a lot of time discussing whether the target would be achieved. Now our conditions to meet the target are very clear,” Treasury Secretary Ana Paula Vescovi told Valor.

There will be no surplus and the government knows it

Before defining how much of this year’s budget it will cut, the government will have to take a much more difficult decision. President Dilma Rousseff and her economic ministers will have to evaluate whether it is worth keeping the illusion that it’s possible to achieve the primary-surplus target of 0.5% of GDP. This is the first time in which the year begins with all private and government economists aware that the fiscal target is a mirage. The best option for the government may be showing full transparency to society on the gloomy situation of public accounts.

Reasons for the high interest rates of Brazil

The Treasury issues bonds under base rate Selic (11%) and the BNDES lends to companies based on the Long Term Interest Rate (TJLP) of 5%. The spread represents the Treasury subsidies, estimated at R$30 billion a year. Most of them are not included in the Budget of the Union, run outside of primary spending and cannot be influenced by Congress, which holds the task of discussing and approving the budget.

Half of credit operations in Brazil don't obey the base rate (Selic) and therefore are not subject to the Central Bank's monetary policy. These rates only affect free credit.

This means that an important share of portfolios at state-run banks is out of reach for the decisions of the Monetary Policy Committee (Copom). They are guided by fixed rates set by the Monetary Policy Council (CMN).

The result of this model is that to fight inflation with the interest rate, according to the inflation targeting regime, the Central Bank has to double its efforts. And who pays the bill for the high rates are those without access to the BNDES, farm credit from Banco do Brasil or housing loans from Caixa Econômica Federal.

Without understanding this anomaly and its effect on demand, there is no way to seriously discuss the reasons why interest rates in Brazil are much higher than in the rest of the world. Since the Selic affects only half of credit, its level has to be much higher than reasonable to contain inflationary pressures. One of the main channels through which the interest-rate lowers demand and fights inflation is credit.

Brazil Progress On Budget Cuts Central To Rating--Moody's

CALGARY (Dow Jones)--Progress by Brazil's government on proposed spending cuts will be fundamental to determining changes in the country's credit rating outlook, Moody's Investor Services said Saturday.

Brazil federal debt up in February on net issue

* Federal public debt up 2.8 pct in February
* Net debt issuance totals 27.25 billion reais in February