With Brazilian inflation now above the target rate, in mid-April the central bank announced a rise in interest rates for the first time since July 2011. But the move, in the face of stubborn and diffuse pressure (over 70% of the country’s inflation basket is now affected by inflation) was dovish – just a 25 basis point increase in the face of the market expectations of 50bp. The minutes from the central bank’s monetary policy committee meeting also showed that two of the eight members voted against any rise.
Some economists read into this a likelihood that the monetary tightening will be quick and shallow. Capital Economics says: “The decision by Brazil’s central bank to raise interest rates by 25bp – as opposed to the 50bp that was priced into the market – suggests that the tightening cycle is likely to be less aggressive than many seem to expect. We think it will be the shortest and smallest tightening cycle in history.”
However, it might be that the inflationary fight will be lengthier and harder than most recognize because of the Brazilian government’s use of opaque accounting measures that assess the extent of inflationary pressures being created by fiscal easing.
It has been long acknowledged that the Brazilian government has been creative in meeting its fiscal targets, but a new report from HSBC sheds light on the government’s increasingly complex financial engineering and attempts to clarify its core fiscal balance.
The law that determines Brazil’s fiscal target gives the government considerable leeway, mainly by allowing accounting adjustments to what is considered its fiscal position. The main adjustment concerns the government’s PAC (growth acceleration plan), which is an umbrella programme covering all federal investments. The PAC dates back to the end of the administration of president Fernando Cardoso (the early 2000s); the PAC adjustment enables the government to exempt (to a limit) public investment from the fiscal targets. This adjustment was hardly used before 2012 as the government was consistently delivering the full fiscal target. “Although the government reported a primary fiscal balance for the consolidated public sector of 2.4% of GDP in 2012, the 3.1% of GDP target was met because of the PAC adjustment,” says HSBC, which also points out that in 2013 and 2014 the adjustment is being expanded to include tax-relief measures.
Also, until 2012 the treasury was required to cover any shortfall in the fiscal targets of local governments and state-owned-enterprises, but from 2014 (and the government indicated that this might be made retroactive to 2013) the treasury will no longer be required to do so. HSBC estimates that rather than meeting a target for the consolidated public sector equal to 3.1% of GDP, the government will probably now focus on the treasury delivering a surplus of 2.15%. And there’s more: to meet the fiscal targets, the government has resorted to several mechanisms that boosted dividend payments by state-owned enterprises – and in particular development bank BNDES. In 2012 dividend payments to the Brazilian treasury totalled R$28 billion ($14 billion) (R$12.9 billion from BNDES and R$7.7 billion from Caixa Economica Federal) of which R$7 billion was anticipated dividend payments that HSBC says “are unusual because they were paid out of a cashflow that was generated by the treasury itself”, with Caixa receiving a capital injection of R$5.4 billion and a loan of $15 billion from the treasury. HSBC calculates that between 2008 and 2012 BNDES has paid the treasury dividends of R$46.9 billion, while over the same period the treasury injected R$275 billion into BNDES.
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