(Bloomberg) -- Brazil’s government is weighing additional spending cuts after a much-anticipated package of reductions failed to soothe investor worries about President Luiz Inacio Lula da Silva’s commitment to fiscal responsibility.
Finance Minister Fernando Haddad pledged Tuesday that the government would continue to work on new ways to control spending, saying in an interview with GloboNews he “will not rest until the fiscal situation is resolved.”
Haddad, who cut short a planned vacation to return to Brasilia this week, and his team are already working on a second spending cut package, according to three officials familiar with the situation. It is aware that it needs to be ambitious enough to calm investor concerns about growing public debt and budget deficits that have ballooned to nearly 10% of gross domestic product, the officials said, requesting anonymity to discuss internal matters.
The economic team is seeking to address the fiscal problems in the first half of 2025, the officials said, as budget concerns have driven Brazil’s currency and its benchmark interest rate to levels the Finance Ministry considers unsustainable.
Their main challenge is still to win support from Lula and his leftist Workers’ Party for ambitious austerity measures, the people familiar said. But they added that the president is aware that the government needs to act to shore up investor confidence after the real plummeted 21% against the dollar — the worst among major currencies — last year.
Haddad said that he had discussed the importance of “fiscal diligence” with Lula in their recent meetings.
“I think the recent currency depreciation has finally grabbed the government’s attention,” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US Inc. “They now need to follow through with measures that stabilize the fiscal situation.”
Last year’s spending cut package was constructed to ensure that Brazil will able to deliver the results required by its so-called fiscal framework. But along with budget deficits, investors are now focused on the trajectory of Brazil’s gross debt, which reached 77.7% of GDP in November and is expected to climb to 81.8% in 2027, according to Finance Ministry estimates.
There is broad consensus inside the economic team that the original package, which aimed to cut 70 billion reais ($11.5 billion) before it was watered down in Congress, was insufficient to produce the decline in public debt that financial markets are seeking. Meeting those demands, however, is likely to prove difficult even if Lula is convinced of the need to try.
According to the officials, investors want Brazil to deliver a primary surplus of 2.5% to 3% to tame the debt. The Finance Ministry currently projects that Latin America’s largest economy will end 2024 with a primary deficit of 0.4% of GDP, and the size of the surplus investors are seeking isn’t feasible in the short-term, the officials said.
The government could propose measures that would not necessarily come into effect immediately but enact more structural changes over the long-term, the officials said. That could potentially win over Lula by pushing at least some of the cuts beyond 2026, when he is planning to seek reelection.
Brazil’s debt is on track to stabilize and begin falling soon, Haddad said in the TV interview, adding that he expects this year’s fiscal results to surprise markets.
“The government needs to do an about-turn and undergo fiscal adjustment that will show investors that they are serious about the fiscal,” said Ashish Chugh, a portfolio manager and head of global emerging-market equities at Loomis, Sayles & Co. “Otherwise, investors will most likely wait until the next election before getting positive on Brazil.”
--With assistance from Andre Loureiro Dias.
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