Brazil Drowning in Sea of Debt

January 30th, 2016 10:48 am | by John Jansen |

Via the WSJ:

BRASÍLIA—Brazil is losing the battle to tame its ballooning debt as the government struggles to revive a moribund economy amid political gridlock, a central-bank report showed Friday.

Latin America’s largest economy ended last year with a budget deficit equal to 10.34% of gross domestic product, the bank said, the widest level in at least 13 years, including the 6.05% in 2014. The country’s debt is also expanding at a rapid pace, putting the country on a hazardous path, economists say. Its ratio of debt to gross domestic product was 66.2% in 2015, up from 57.2% the year before, said the central bank.

Brazil’s fiscal profile worsened sharply last year despite deep budget cuts and repeated promises by President Dilma Rousseff’s administration to improve government finances, promises she was unable to fulfill.

“What is being done to keep the debt from getting to a point where it can’t be paid?” asked economist Armando Castelar of the Ibre think tank in Rio de Janeiro. “There are no signs of change.”

Ms. Rousseff is battling impeachment procedures in Congress, making it almost impossible to repair public finances through legislation. Around 90% of national spending is earmarked and can’t be cut without lawmakers’ approval.

Tax increases are also harder to pass in a year in which crucial municipal elections will be held. Regional governments are struggling to pay salaries and keep health, education and security services running, increasing calls for federal help.

The administration was surprised by a deeper-than-expected economic contraction last year, estimated at 3.7%, which sapped tax revenue.

Economists now fear the government won’t have much more room to reduce the budget gap in 2016 because tax revenue is expected to remain light while the recession continues. Analysts polled by the central bank forecast GDP will shrink 3% this year.

Ms. Rousseff and her economic team are still looking for ways to help stimulate growth. The government announced plans on Thursday to increase the credit supply to families and companies, mostly through state banks, as a way to alleviate the recession.

Officials said the plan won’t hurt public finances because the credit won’t be subsidized, but analysts say record low confidence levels mean the extra credit is unlikely to generate much growth-spurring investment.

“Who wants credit with so much uncertainty?” said Andre Perfeito, chief economist at Gradual Investimentos brokerage firm. The stimulus plan “is like stepping on the gas while pulling the parking brake,” he said. “You only burn fuel to go nowhere.”

Economists in and out of the government say more stable public finances are crucial to restoring confidence, and growth, in the economy.

To be sure, some of Brazil’s fiscal indicators aren’t as bad as those in some other countries. The debt-to-GDP ratio was 177% in Greece and 103% in the U.S. in 2014, according to Trading Economics. But the U.S. can borrow at near-zero interest rates, and Greece’s European Union partners have an interest in keeping that country solvent, while Brazil is forced to pay an average of 15.4% interest on its debt.

“Almost all of [Brazil’s] budget gap comes from interest,” Mr. Perfeito said.

The fiscal pressure is likely to continue in 2016 and beyond. Unraveling public finances were a key factor in the decision by credit-ratings firms to send Brazil back to junk status last year for the first time since 2008. Economists are now expecting further downgrades, as the debt load gets bigger.

The Ibre think tank estimates gross debt will reach 82.7% of GDP by the end of this year.

The Finance Ministry didn’t respond to a request to comment Friday, but Finance Minister Nelson Barbosa has promised to save more taxpayer money this year. The 2016 primary budget result, a closely watched measure that doesn’t count interest payments on public debt, will be a surplus equal to 0.5% of GDP, reversing last year’s record 1.88% deficit, according to the minister.

But few analysts think that goal is achievable. “It will definitely be a very challenging target to meet,” said Alberto Ramos, Goldman Sachs ’s top Latin America economist. “It will require significant spending discipline.”

Write to Paulo Trevisani at

Corrections & Amplifications:
The 2015 result was affected by the administration’s decision to pay 55.8 billion Brazilian reais ($13.8 billion) in debt it had with Brazil’s large state-controlled banks. A paragraph in an earlier version of this article had the wrong amount. That paragraph does not appear in the updated version.

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