Brazil approves limited $ 8 billion pandemic spending program

Brazil’s Congress has approved an $ 8 billion emergency aid package to help deal with a second wave of the coronavirus pandemic that has triggered economic shutdowns across the country.

The packaging, which is considerably smaller than the $ 50 billion stimulus adopted at the onset of the crisis last year, has been well received across the political spectrum, with economists and investors praising a limited impact on Brazil’s growing debt.

“The relatively modest emergency aid package and fiscally conservative spending plan are positive for the credit. . . because the plan will support consumption while limiting the effect on fiscal accounts, ”analysts at rating agency Moody’s said.

The legislation was approved after Brazil on Wednesday recorded a record 2,286 deaths in one day, underscoring the severity of the latest wave. More than 270,000 Brazilians have died from Covid-19, while more than 14 million are unemployed and more than 31 million work in informal jobs without a social safety net.

“It would be great to have a $ 35 billion emergency benefit package, but we can’t do it due to fiscal risk. At least [the new package] will prevent people from going hungry, ”said Felipe Rigoni, a deputy from the Brazilian Socialist Party.

The approval of the package paves the way for the Bolsonaro administration to relaunch a money transfer program, which is expected to include monthly payments of 150 to 250 reais ($ 40) to the country’s poorest for the next four months.

It is a scaled-down version of an allowance program launched at the start of the coronavirus crisis, which has been widely credited with boosting the Brazilian economy and the popularity of President Jair Bolsonaro.

The fiscal stimulus, however, baffled investors as Brazil’s debt soared to more than 90 percent of gross domestic product.

In the second half of 2020, the Brazilian sovereign bond yield curve rose sharply, with investors demanding higher premiums to lend on longer terms.

Analysts fear Brazil’s public finances will deteriorate significantly this year if Bolsonaro spends to increase his popularity ahead of the 2022 election.

These fears were exacerbated this week after a judge in Brazil’s highest court quashed transplant convictions of Luiz Inácio Lula da Silva, the former president, who could set up the left leader for challenge Bolsonaro in the polls.

The package adopted on Friday allayed much of those concerns because of its limited reach and because it did not break the spending cap imposed by the country’s constitution – a key budget anchor for investors. This was achieved by classifying many of the new spending under “calamity” clauses, which are accounted for separately in the government budget.

Solange Srour, chief economist at Credit Suisse in Brazil, said that while the package did not cut government spending, the effect on debt on GDP was “very small”.

“This [bill] is important as a fiscal anchor, helping the government to gain credibility despite higher spending, ”she said. “It’s an anchor that keeps the market going to believe that spending won’t get out of hand.”

The budgetary question is particularly urgent because Brasilia must this year refinance a debt representing nearly 20% of the GDP.

In recognition of market nerves, Congress and the government have included a number of so-called tax triggers in the latest aid package that would limit spending by the federal government, the legislature and the judiciary.

“These triggers are harsh, but they are necessary so that there is no mistaken perception that the government is abandoning the trail of fiscal responsibility, even during this pandemic,” said Vitor Hugo, a member of the Socialist Party. liberal pro-government.

“We believe the government should prioritize measures to contain spending and promote reforms and privatization.”

Srour warned, however, that the package did not signify a “shift in fiscal policy in Brazil”.

“It is not enough to completely restore confidence,” she said. “You would need real spending cuts rather than just preventing spending increases.”

Eduardo de Carvalho, portfolio manager at Pacifico Asset Management in Rio de Janeiro, said the crux for the Brazilian economy and fiscal situation was “the evolution of the virus” in the coming months.

“If the virus gets worse over the next few months, the pressure to spend more will increase. Spending will increase again while growth will be degraded, ”he said. But “if the current isolation measures put in place by local governments are successful in slowing the virus and the vaccines continue to arrive, it could be positive.”

De Carvalho added that it was also a “good signal” that Paulo Guedes, Brazil’s hawkish finance minister, was able to exert influence in the process, especially with regard to budget triggers to limit spending.

The future of Guedes, free market economist, as did the Minister of Finance looked in doubt in recent weeks, after Bolsonaro intervened to oust the head of the state-controlled oil major Petrobras, causing tremors in the country’s economy.

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