The downward revision in budget cuts was a negative surprise and may worsen the market’s reaction.
The government’s bi-monthly review of the 2024 budget, presented yesterday, negatively surprised economists and is expected to pressure domestic assets at the start of next week.
Overall, the assessment is that there were improvements in estimating some revenues and expenses, and that achieving this year’s primary result target is still “within reach.” However, the government missed the opportunity to make a larger expenditure block that would have made the spending projection more credible, leaving analysts with a worsened impression. This will likely require a stronger block in the last report of the year, scheduled for November 22.
“There are some constructive points, but overall, net, the surprise was slightly worse,” said economist Andrea Damico, founder and CEO of Buysidebrazil.
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Spending not subject to the target—mainly aid to Rio Grande do Sul, but also expenses related to fighting wildfires and settling court-ordered payments—increased from R$28.8 billion in the July report to R$40.5 billion in September. “No one questions that these are extreme events, but despite that, it leaves a slightly bitter taste to see that a significant portion of the deficit comes from expenses outside the spending cap,” said Damico. “This is a point of discomfort,” she added.
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Damico, from Buysidebrazil, estimates that the government will need an additional cut of R$10 billion to R$15 billion in November, depending on how revenue collection performs in the coming months, to reach the lower band of the target. “We expect a deficit of R$80 billion. The government has R$68.8 billion, considering the R$40 billion outside the target. So, we see that additional fiscal effort will be needed in the next bi-monthly report,” Damico stated.
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Revenue from dividends was revised upward by R$10.1 billion between July and September. The GDP forecast for 2024 was also updated from 2.5% to 3.2%. “Revenue has, in fact, seen endogenous growth, justified by a more resilient economic activity. The GDP forecast for 2024 was once 2% and is now at 3% in a very short period. Revenue collection needs to reflect this, which is a genuine improvement,” said Damico from Buysidebrazil.
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“In general, the revenue side has more positive than negative news, although part of the revenue is still tied to extraordinary sources,” said Damico.
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Damico pointed out that recognizing the increase in mandatory expenses is important but ends up “consuming” the space for discretionary spending, which “hurts the credibility of this adjustment,” she added […]
