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UPDATE 2-Brazil primary surplus to improve in coming months -c.bank

by on July 31, 2012 4:00 pm GMT
 

Tue Jul 31, 2012 12:00pm EDT

* Brazil’s primary surplus rose to 2.794 bln in June

* Falling tax revenue puts primary target in jeopardy

* Public debt-to-GDP ratio up to 35.1 pct

BRASILIA, July 31 (Reuters) – Brazil’s primary budget
surplus is expected to grow in coming months as an increase in
economic activity helps contribute to higher government
revenues, the central bank said on Tuesday.

The primary surplus rose less than expected in June from
May, central bank data showed on Tuesday as a decline in tax
revenue continued to weigh on government finances.

“(The result is due to) a slowdown in income via economic
activity, an increase in investments and a pullback in dividends
(from state-controlled companies),” said Tulio Maciel, head of
the bank’s economic department at a press conference in
Brasilia. “But along with the outlook for an economic recovery
in the second half of the year, there will be a rebound in
income.”

The central bank expects Brazil to grow by 2.5 percent in
2012. While a far cry from 2010’s red-hot 7.5 percent growth
rate, such performance would imply a rebound in coming months.

Economists in a Reuters poll were less optimistic. They
predicted that the largest economy in Latin America will grow
less than 2 percent this year, fueling speculation that the
government’s fiscal goal is at risk.

Brazil posted a consolidated primary budget surplus
of 2.794 billion reais in June, the central bank
said on Tuesday.

The primary budget surplus is a gauge closely watched by
investors because it measures a country’s ability to service its
debt. It represents the excess of revenue over expenditures
before interest payments are taken into account.

The primary surplus was expected to reach 6 billion reais,
according to the median estimate of 10 analysts polled by
Reuters. Estimates ranged from a low of 2.5 billion reais to a
high of 10.7 billion reais.

The public debt-to-GDP ratio rose to 35.1 percent in June
from 35 percent in May and 35.7 percent in April.

Brazil’s central bank said it expects that ratio to decline
to 34.7 percent in July, which would be the lowest reading since
the historical series began in 2001.

In the 12 months through June, the primary surplus – which
excludes debt servicing costs – was equivalent to 2.71 percent
of gross domestic product, down from 2.97 percent in May.

President Dilma Rousseff has vowed to achieve the annual
primary surplus target of 140 billion reais ($68.2 billion), or
about 3.1 percent of gross domestic product, in order to help
the central bank maintain interest rates at record lows and
stimulate economic growth.

That could be a challenge as Brazil’s federal tax revenues
dropped more than expected in June after a stubborn economic
slowdown hurt corporate profits and prompted the government to
grant tax breaks to some industries.

Rousseff’s effort to control government spending has allowed
the central bank to cut 450 basis points off its Selic rate
since August to a current record-low 8 percent.

While a possible budget overrun would raise questions about
the government’s fiscal strategy, it may not necessarily hurt
Brazil’s debt metrics as interest rates fall to all-time lows,
Moody’s analyst Mauro Leos said in an interview last week.

Lower rates, by reducing the cost of debt, can help the
debt-to-GDP ratio fall even if the primary surplus slips.

Overall budget balance, which includes interest payments,
posted a deficit of 13.325 billion reais ($6.5 billion) in June,
down from a deficit of 16.064 billion reais in May.