Brazil's first-ever primary deficit puts strain on infra projects

Brazil's government on Monday delivered its proposal for a 2016 national budget to Congress, which for the first time in the country's history includes a primary deficit. 

The projected shortfall of 0.5 percent of GDP (roughly BRL$30.5 billion) is a deep cut from projections made at the start of the year that estimated 2 percent growth, which was later cut to 0.7 percent after the close of Q1.

A primary deficit occurs when a budget fails to achieve balance before interest payments. Brazil never experienced such a deficit until last year, when the impact of the widening corruption investigation within state-run oil company Petrobras made its first major impact on the financial sector. It appears the struggling South American nation is set for a repeat this year. 

According to Reuters, Planning Minister Nelson Barboa said on Monday that “Brazil's 2016 budget estimates a total revenue of BRL$1.4 trillion ($387 billion), net revenue of BRL$1.18 trillion and total expenditures of $1.21 trillion”.

The precarious state of Brazil's finances has made its mark across the Brazilian economy, which as of last month entered a bear market after the national Ibovespa securities index slid more than 20 percent in two months. Part of the blame was placed on concerns that China, a top trading partner with Brazil, will not succeed in attempts to revive its own economy. 

Attempts by the Rousseff administration to impose austerity measures that would right the course of the careening Brazilian economy have been thwarted by a hostile Congress, leading to speculation that, unless things are brought in check, further downgrades to junk status from ratings agencies could be on the way.  

According to a Barrons.com blog post by Jeffries head of Latin American strategies Siobhan Morden, “ratings agencies have provided some near-term breathing room and have somewhat accepted a more gradual fiscal adjustment process with a wait and see on the economic performance for next year”.

But Morden warns that if political actors stand in the way of economic progress, then Brazil's investment-grade rating could be in jeopardy.  

“If officials interrupt the adjustment process with no improvement this year or the next then this invites negative action from the ratings agencies,” Morden said, going on later to add, “On admitting defeat and proposing a primary fiscal deficit for 2016, this completely stalls the adjustment process and leaves Brazil just vulnerable to global macro trends.” 

According to Fitch Ratings' head of Latin American sovereigns Shelly Shetty, “the revision of the target to a primary deficit for next year (as detailed in the 2016 budget),which comes on top of the July 2015 downward revision of primary surplus targets for future years, highlights the difficulty that Brazil is confronting on fiscal consolidation.” 

“These downward revisions put the trend of primary surpluses well below Fitch's baseline scenario used in April and highlight the growing risks to the trajectory of public finances and debt,” Shetty said. “The trajectory of growth, fiscal and debt dynamics will determine Brazil's ratings going forward. Fitch will continue to monitor and assess the implications of the fiscal deterioration embedded in the 2016 budget for future government debt dynamics.” 

As for Standard & Poor's (S&P) and Moody's, Barclay's economist Bruno Rovai on Monday told the Wall Street Journal that he expects the government to work with lawmakers to make changes to the proposal, resulting in more savings. With that in mind, he said he believes Congress will try to approve a budget without a primary deficit, though he forecasts that S&P will cut Brazil to junk status early next year, with Moody's following suit by the second half of 2016. 

PROJECTS DESPITE PROBLEMS

Despite economic woes, infrastructure development continues in Brazil, even in the energy sector which has been heavily impacted by the Petrobras corruption scandal. 

Take for example Globo Brazil, a company that last week inaugurated what is now the largest solar photovoltaic (PV) manufacturing facility in Brazil. The 180-megawatt (MW) capacity facility, located in Valinhos, Sao Paulo, is expected to produce up to 2,000 solar PV panels per day when fully operational. It will likely drive down the cost of solar energy development in the country, according to cleantech watchdog Clean Technica. The inauguration followed news that the Brazilian government recently approved 649 new potential solar energy projects, totalling 20.9 gigawatts of added capacity, to compete in the upcoming energy reserve auction set for November 13.

Switzerland-based SwissEnergy is also choosing not to let the current turmoil get in the way of plans to develop a wind equipment factory in Piaui, a state with an aim to become one of the top wind energy states in Brazil by 2017. The company, led by president Stefan Simon, recently presented Piaui with his company's aspirations to build a plant to manufacture gearless turbines, generators and other components. If the local government agrees to terms, it will become SwissEnergy's first deal in Brazil.

In other wind energy news, Spanish Acciona this week opened a new maintenance facility to provide support to its own wind farms in the Rio Grande del Norte state, which is currently home to 264 installed Acciona AW3000 turbines producing 792MW. 

HOPE IS NOT LOST

According to a recent blog post authored by director for Latin America at the Eurasia Group Joao Augusto de Castro Neves, these investments are in line with his view that “not all is lost”, and that there are “a few bright spots in Brazil”.

“The first is that Brazil's institutions work. The current turmoil, which is driven by deep political and economic difficulties, does not constitute an institutional crisis,” he wrote, noting that in Brazil, politicians have little recourse to interfere with investigations into wrongdoing – something that has set the Petrobras case apart from other recent corruption scandals in the region.

“Another reason for cautious – yet longer-term – optimism is Brasilia's long history of shifting economic policy to keep the country afloat. Even though a more acute crisis could push Rousseff's Workers' Party to the left and away from the fiscal adjustment, she will likely move to the right in an effort to spark an economic recovery that would save the remainder of her term,” de Castro Neves said.

“This 'course correction' will eventually translate into a more pro-business set of policies across different sectors of the economy, particularly those at the center of the current scandal – energy and infrastructure.”