Brazilian economy; still a strong momentum. Brazilian economy should expand by at least 6.5% in 2010. This strong momentum partly stems from fiscal stimuli that slosh through the economy and propel demand. The expected growth in corporate earnings in 2010 supports the attractiveness of investments in Brazil.
Government spending, not so great. The public sector saw a deeper budget deficit in March.The pickup in government spending early this year is an example, as both administrative and investment expenditures gain steam in Q1. Fresh fiscal data released last Friday by the Central Bank confirm this trend.In 1Q10, the central government’s primary fiscal balance stood at BRL 8.4 billion, about BRL 1.6 billion shy of a weak surplus seen in 1Q09. Fiscal revenues climbed 11% yoy in real terms, implying that the speedy execution of budget expenditures fully explains the fiscal performance so far in 2010.
However, the lion’s share of the surge in federal spending has been going to discretionary outlays, where the government has greater room to maneuver. In 1Q10, inflation-adjusted discretionary expenditures (OCC, in Portuguese) soared by 31% yoy, accounting for almost half of the total rise in federal spending. This pace compares with a real OCC expansion of 6% yoy in 4Q09.
Public investment doubled. But what about quality? Public investment has more than doubled in the first three months of the year, comprising the majority of the OCC variation. In the last quarter of last year, capital spending was growing strongly, though at a much less intense pace (32%).
Election may be the trigger to spending. The quickening of discretionary capital spending partly reflects legal constraints in public outlays for election years, as prescribed by the Fiscal Responsibility Law (LRF). These restrictions tend to displace a major slice of those expenditures to the first half of the year.
The discretionary lines related to administrative expenses have also registered rapid real growth: 17% yoy, following a 2% yoy contraction in 4Q09. That means considerable acceleration also in federal overhead.
Fiscal Stimulus does the trick. The fiscal spending pick-up provides an additional source of stimulus for domestic demand in the early months of 2010. Even though we believe that the expenditure growth should lose momentum in the 2H10, helped by the legal strictures, the ongoing rebound in tax revenues should make room for a substantial increase in public spending in the year as a whole.
On one hand, we have a gradual removal of sector-specific tax breaks and a probable increase in this year’s primary surplus (to 2.7% of GDP, from 2.1% in 2009). On the other, we have a steep growth in public expenditures and the earmarking of BNDES corporate loans on the heels of a recent BRL 80 billion capital infusion.
On balance, it looks like fiscal policy will continue to add stimulus to consumption and investment, lending a strong hand to the expansion of demand in 2010.
Sources: Strategy reports of Itau-Unibanco, Bradesco, Ativa Corretora