Primary budget balance
Brazil’s budget balance is an important indicator of its financial health. The indicator is used by both foreign investors and credit rating agencies to decide whether the nation is investable or not.
Brazil’s government sets a target for its primary budget balance. At the beginning of 2015, Dilma Rousseff’s government set a primary budget surplus target of 1.1% of GDP. By the middle of that year, the target was reduced sharply to 0.5% of GDP. It later ended in a budget deficit.
For 2016, the Rousseff administration expected a primary budget surplus of 2% of GDP. The expectation was expressed early in 2015.
However, since the budget balance turned to a deficit in 2015, the 2016 target was lowered to a 0.5% surplus. The finance minister of Brazil at the time, Joaquim Levy, wanted the target to be 0.7%. Later, even the 0.5% target was reduced to nothing.
From surplus to record deficit
A release from the Central Bank of Brazil showed that the country’s cumulative primary deficit minus any interest payments stood at 136 billion Brazilian real in the 12-month period until March 2016. This was a record 2.3% of the country’s GDP.
To draw a contrast and give you an indication of the financial state of Brazil, the country’s budget balance was in a surplus of over 100,000 real, or 2.9% of GDP, in September 2010.
A budget deficit means that Brazil cannot set aside any money to fulfil its debt obligations. 2016 would mark the third successive year of budget deficit for the country. This deficit is what caused Brazil to lose its prized investment-grade rating in 2015.
Equities continue to surge
Investment-grade rating or not, Brazil’s stocks (SQM) (ITUB) (LFL) and the Brazlian real continue to rise. The worse the news for Dilma Rousseff, the better stocks and related instruments (JLTAX) (BDERX) are performing.
The budget deficit isn’t the only problem for Brazil’s economy. Inflation has also squeezed the consumer. Let’s take a look at this in the next article.