For 2024, the main risks continue to be around the under-execution of investment projects and discretionary spending, leading to potential delays in government tenders and harder negotiations for price and volume increases in mandatory spending. For 2025 and beyond, the business implications will depend on which path Brazil’s federal government chooses to pursue—if the economic team decides to maintain the original fiscal targets and incur the restrictions on the rate of government spending, mutlinationals could expect to see negotiating pains around government tenders. However, if Brazil decides to adjust the fiscal targets to account for the downward trajectory in public accounts, signaling a lacking commitment to fiscal consolidation, multinationals should expect to see greater impacts to FX volatility, downward pressures to investment intention, and an increase to country risk.
Brazil’s National Treasury announced a deficit of BRL 104.6 billion for the first eight months of 2023, marking the worst result for the first year of a presidential term since 2020. This financial worsening is accentuated by the combined effect of increased public spending—as allowed by the constitutional amendment approved in late 2022 (PEC da Transição) to finance greater social spending—and a slowdown in tax revenue. Ultimately, Brazil’s ability to zero the primary deficit in 2024 (as stipulated in the new fiscal framework) remains highly uncertain, as does the coordination of government spending in the short term.
The deterioration in fiscal accounts is a combination of lower revenue growth—given the slowdown in one-off, extraordinary revenue drivers related to high commodity prices that propelled Brazil to its first primary surplus last year since 2014—and higher public spending. At the current government spending and revenue collection rate, it is becoming increasingly likely that Brazil will miss the 2024 fiscal target, which stipulates the country’s primary deficit must be zeroed. As a result, Brazil’s Ministry of Finance is working on measures to help increase the level of revenue collection, including taxing exclusive funds and trusts, changes to tax breaks relating to the “interest on equity” provision, and the imposition of income taxes on offshore funds owned by residents. However, these measures hold a high level of opposition in Congress; therefore, making up the deficit shortfall through greater revenue collection remains highly unlikely. Ultimately, whether Brazil readjusts the 2024 primary balance target or sustains the penalties that will limit the growth of government spending will be a key signpost to watch to gauge Brazil’s commitment to fiscal consolidation and responsibility. In our view, the worst outcome for fiscal accounts would be to have the recently approved fiscal targets changed. It would likely be better to keep the original targets and allow the “triggers” and other penalties kick in over time, seeing as changing the original goalposts in the first year of the new fiscal framework could be perceived as damaging its credibility and have negative implications to Brazil’s country risk.
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