Brazil debt set for biggest fall since 1994
Brazil's closely-watched debt burden is set this year to stage its biggest decline in a decade as years of cost-cutting and hard-won stability finally pay off, analysts said on Friday.
For President Luiz Inacio Lula da Silva, a former labor leader who once toyed with defaulting on Brazil's foreign debt, the achievement may be the ultimate proof his center-left government is fully committed to fiscal responsibility.
Helped by swelling tax revenues generated by strong growth, Lula decided this week to raise the country's 2004 primary budget surplus goal to 4.5 percent of gross domestic product from 4.25 percent of GDP, allowing more debt to be paid off.
"The fact that they managed to announce this without antagonizing people is amazing," said Larry Krohn, a Latin America analyst at IDEAGlobal. "Its been an exceptional fiscal performance."
Brazil has been on an International Monetary Fund lifeline since 1998 and tough budget goals were adopted by the former centrist government of President Fernando Henrique Cardoso.
They were never popular and when Lula took office in January 2003 there were loud dissenting voices inside his Workers' Party with his decision to adopt yet more ambitious fiscal goals.
Altamir Lopes, head of the central bank's economics department, said on Friday the change in the 2004 primary surplus goal, which excludes debt servicing costs, means Brazil's public debt will reach 55 percent of GDP at year-end.
It will mark the biggest yearly fall in over a decade. At the end of 2003 it stood at 58.7 percent.
"That is a very rapid fall in one year," said Mauricio Oreng, an economist at Unibanco, predicting it will fall as low as 54 percent. "Since the introduction of the Real Plan (with the launch of the real currency in 1994) we have never had such a large fall."
In fact, since 1994, Brazil's large debt burden -- which at 940 billion reais ($330 billion) is considered its biggest risk and the largest constraint on its credit-worthiness -- has only risen. It fell in one year, 2000, and then by a mere 0.5 percentage point to 48.8 percent of GDP.
Debt stood at 30 percent in 1994. Its highest level since then in a single month was in August 2002, when it hit 61.2 percent as markets slumped on concerns Lula would come to power and mismanage the economy.
The final goal of the IMF loan programs was always to reduce Brazil's debt burden, which pushes interest rates higher and ultimately is one of the main reasons why Brazilian growth has lagged behind many emerging markets in recent years.
High growth this year, made possible by lower interest rates and confidence won by Lula last year with budget cuts, is spurring tax revenues. GDP growth is expected to reach more than 4 percent this year after the economy contracted 0.2 percent in 2003, its worst performance in a decade.
August primary surplus figures released Friday showed high tax revenues allowed Brazil to beat a key target under its $40 billion IMF loan deal with billions of dollars to spare.
It is not guaranteed that debt will keep falling though. For one, about 50 percent of Brazil's debt is pegged to the benchmark Selic interest rate, which was raised last week for the first time in 19 months, because of rising inflation.
The Central Bank also implicitly raised its central 2005 inflation goal this week to 5.1 percent from 4.5 percent, implying that price pressures could prompt more rate hikes, analysts said. Higher rates would raise debt servicing costs, making it harder to keep the debt ratio on a downward path.
"We've seen the Central Bank hiking rates before, oblivious to the damage on the fiscal accounts," said Krohn. "Whenever you tighten, there are trade-offs."
(From Reuters, September 24, 2004)
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