Federal Deputy Rodrigo Pacheco (L) speaks in the Chamber of Deputies, during a Commission of Constitution and Justice meeting, in Brasilia, Brazil October 17, 2017. Photo: Reuters/Adriano Machado

Analysis: Vowing budget control, Brazil faces pressure to keep spending amid COVID-19 second wave

Lawmakers seeking to become the next leaders of both houses of Congress are looking for ways to protect growth and Brazil's poor from the pandemic

Brazil‘s government entered 2021 determined to slash last year’s record budget deficit, but a devastating second wave of COVID-19 and fragile economic growth are piling the political pressure on President Jair Bolsonaro to keep spending.

Lawmakers seeking to become the next leaders of both houses of Congress have told Reuters they understand the importance of restoring the public finances back to health, but are looking for ways to protect growth and Brazil’s poor from the pandemic.

Senator Rodrigo Pacheco, the front-runner in the race to lead the upper house, said on Thursday he will discuss extending emergency cash transfers to millions of Brazilians with lawmakers and the Economy Ministry. He recognized it would be a challenge to do that, given a constitutional spending cap.

The plan is to find a way to make the spending ceiling compatible with assistance for people hurt by the pandemic. (…) Right now, I do not have the formula to reconcile (extending) emergency aid and the spending cap

Senator Rodrigo Pacheco, the front-runner in the race to lead the upper house in the next two years.

Investors balked at the prospect of more heavy spending after the government chalked up record deficits and debt last year, and pushed the real down 1% against the dollar on Thursday and another 1.8% in Friday trading.

Despite the market unease and stated intentions of Economy Minister Paulo Guedes, Bolsonaro may end up reviving in some way an emergency aid program for tens of millions of the country’s poorest people that ended on Dec. 31.

These stipends formed the lion’s share of a lavish fiscal support package last year that ensured Brazil’s economy did not shrink nearly as much as many feared at the onset of the pandemic.

End of stipends

As the following chart from the International Monetary Fund shows, it was one of the most generous programs of any emerging economy. It also outstripped those in many developed economies, who are richer and can borrow far more easily and cheaply.

While it saved lives and limited the economic recession, it came at a financial cost. The government’s 2020 budget deficit was on course to hit a record 800 billion reais, or 11% of gross domestic product.

Guedes insists that the stipends will not be repeated this year, and that the country’s priority is a resumption of fiscal consolidation to get the deficit and public debt back down.

But withdrawing up to 8% of GDP worth of stimulus will be challenging for the economy, to put it mildly, and throw millions of families into extreme financial hardship just as the second wave of the virus breaks.

For Julia Braga, Associate Professor of Economics at the Fluminense Federal University in Rio de Janeiro, income assistance is critical to the survival of millions of people.

“Even with the economic rebound and growth of 3.0% to 3.5%, the economy will not be able to generate enough jobs for people who lost theirs or who left the labor force last year and are out of work,” Braga said.

The Economy Ministry declined to comment.

Polling pressure

Extending the emergency stipends for an extra three months last year boosted populist Bolsonaro’s approval ratings. The latest opinion polls may tempt him to do something similar soon.

An XP Investimentos/Ipespe poll this week showed that 40% of Brazilians think Bolsonaro is doing a terrible or bad job, up from 35% last month and his highest disapproval rating since June.

Some 50% of Brazilians think there should be some form of emergency aid program for the next few months, although only 27% think the government will provide one, the poll showed.

The government’s fear is a financial market backlash, which could see the currency fall back toward last year’s record low near 6.00 per dollar, with bond yields and spreads blowing out again.

The Treasury already has to roll 605 billion reais of debt in the first four months of this year, worth 14% of all its outstanding debt. According to Societe Generale, Brazil’s total sovereign debt maturing this year is worth 33% of GDP, the highest of any emerging economy.

These are the kind of numbers that keep Guedes, his team, and investors awake at night.

Alberto Ramos, head of Latin American research at Goldman Sachs, believes the government will bow to congressional pressure to revive the emergency stipends, and that the market could swallow a program worth up to 2% of GDP.

With the second wave, the social need for more emergency support is there. You need to control the pandemic and make sure people can get out the other end healthy and not bankrupt

Alberto Ramos, head of Latin American research at Goldman Sachs.

“But that is going to be expensive. There’s no easy fiscal path ahead. That’s the reality for Brazil,” he said.