Brazil may have to cut is primary fiscal surplus by one percentage point this year, observers believe.
John Welch, analyst at Itau bank, said that the target for the surplus (before debt servicing), currently 3.8% of GDP, could be brought down to 2.8%.
That does not kill anybody, but it depends how you get there, he said. Better to cut taxes than to expand public expenditures to stimulate economic activity, he told Emerging Markets.
High public expenditure remains a sore point. If [the authorities] start messing around with public expenditure, it gets more difficult, Welch said. They need to cut public spending. Tax cuts are a stimulus. [The government] used it very judiciously, but they could do more.
But Brazils planning minister Paulo Bernardo Silva acknowledged in an interview with Emerging Markets yesterday the country would face serious fiscal restrictions this year.
He estimated a decline in fiscal revenues of 48 billion reais which would have to be translated in spending.
Unlike in the past, were not spending money to cover losses, he said, adding that Brazil would expend efforts to keep the fiscal balance in check.The steep contraction of the economy in the past six months has led to a fall in tax revenues, which, coupled with the drop in commodity prices, is also a cause for concern.
The Institute of International Finance (IIF) says in a report issued today: Brazils scope for substantial countercyclical fiscal policy is severely constrained by revenue earmarking, substantial fiscal rigidity and a still-high gross public debt-to-GDP ratio of 59%.
Brazilian officials are still shrugging off talk of recession in the largest Latin American economy.
Jose Carlos Miranda, Brazils executive director at the IDB, told Emerging Markets: The evidence I have does not show that Brazil is in recession. You cannot just take the data for the last quarter of last year and the first quarter of this year, and then annualize them to project the 2009 GDP growth rate.
Miranda called Morgan Stanleys recent Brazil GDP growth forecast of 4.5% completely weird.
He argued that the Central Bank interventions in the currency futures market were not affecting the volume of reserves, which are slightly below $200 billion.
Richard Franck, CEO of Darby Investment Overseas, who has several private equity interests in Brazil, said: They never [before] had that kind of cushion to help on their sovereign picture and foreign exchange transactions. This is a tremendous advantage.
Brazil has also benefited from its floating exchange rate, IIF Latin America economist Frederick Jaspersen said. They have been very cautious in managing their reserves. They have some firepower there if things get really tough.
Jaspersen said Brazil has a lot of back up support to these reserves, as it could access credit lines of up to $60 billion from the IMF and the US Federal Reserve, as part of a currency swap deal.