Brazil’s interim President Michel Temer said on Tuesday (May 24) he would seek a constitutional amendment to curb public spending as his government unveiled a raft of austerity measures to reduce a record fiscal deficit and regain investor confidence.
Temer, a centrist who took over from leftist President Dilma Rousseff two weeks ago after she was suspended pending an impeachment trial, told congressional leaders that the amendment would limit growth in primary government spending before debt payments to the rate of inflation from the previous year.
He said the move would be the best way to bring down high interest rates, recover the country’s credit standing and jump-start economic growth amid the deepest Brazilian recession in decades.
Finance Minister Henrique Meirelles told a news conference in the Brazilian capital the measures were important to restore investor confidence.
“The recuperation of activity will serve to recuperate confidence, which starts with the proposal of certain measures, so investors and consumers start to have a clear idea of what is being proposed, and of course this will also depend on how the process goes forward in the National Congress,” said Meirelles.
Brazil lost its coveted investment grade rating in December and the central bank’s benchmark interest rate rose to 14.25 percent as deficit spending by the government sent inflation surging into double digits last year.
The effectiveness of the measures, however, will depend on the interim government ensuring sufficient support in Congress, where opposition is still being voiced over Rousseff’s suspension.
“What is underway is a coup, which has two principal objectives. One of these is to change – without a vote – the economic and social course of the country, taking rights away from the worker and getting rid of all the conquests of the last decade,” Senator Vanessa Grazziotin said on Tuesday.
Brazil’s currency and benchmark Bovespa stock index both gained slightly on Tuesday, signalling investors were not overly optimistic that Temer’s plan would lead to a quick economic recovery.
Markets have generally warmed to Temer’s government, which has vowed to pursue a more business-friendly program than the Rousseff administration, but the departure of a key minister on Monday showed the political challenges he faces.
Ignacio Crespo, an economist from Guide Investments told Reuters that the Brazilian government’s objective with the measures we to restore confidence in Latin America’s number one economy.
“The objective of the measures is to restore investor confidence in the course of government accounts. They are intended to not only stabilise the outlook in the short term, but to try to establish confidence in the trajectory of, in the improvement of the sustainability of the Brazilian deficit,” he said.
But Crespo added that whilst the new proposals were a move in the right direction it does not do enough to bring the deficit under control.
“For now we have several signals that the measures are a little more general than investors would like, but it is seen as a good step towards something more specific. Looking ahead we can expect greater analysis of the situation to create more concrete measures to improve the fiscal trajectory,” added Crespo.
Brazil’s overall deficit will top 10 percent of gross domestic product for a second straight year.
More than two-thirds of the Senate and lower house backed impeaching Rousseff, whose popularity plummeted amid the economic crisis.
But unpopular spending caps and tax increases at a time of rising unemployment could threaten Temer’s fragile coalition.
(c) Copyright Thomson Reuters 2016