Brazil approves limited $8bn pandemic spending package

Brazil’s Congress has approved an $8bn emergency aid package to help deal with a second wave of the coronavirus pandemic that has triggered economic shutdowns across the country.

The package, which is considerably smaller than the $50bn stimulus passed at the beginning of the crisis last year, was welcomed across the political spectrum, with economists and investors have lauded a limited impact on Brazil’s growing debt pile.

“The relatively small emergency aid package and the fiscally conservative spending plan are credit positive . . . because the plan will support consumption while limiting the effect on fiscal accounts,” said analysts at rating agency Moody’s.

The legislation was approved after Brazil registered a record one-day death toll of 2,286 on Wednesday, underscoring the severity of the latest surge. More than 270,000 Brazilians have died from Covid-19, while more than 14m are unemployed and more than 31m work in informal jobs with no social safety net.

“It would be great to have a $35bn emergency benefit package, but we can’t do that due to the fiscal risk. At least [the new package] will prevent people from going hungry,” said Felipe Rigoni, a lawmaker with the Brazilian Socialist party.

The approval of the package paves the way for the Bolsonaro administration to relaunch a cash transfer scheme, which is expected to include monthly payments of 150-250 reais ($40) to the nation’s poorest for the next four months.

It is a scaled-down version of a stipend programme launched at the beginning of the coronavirus crisis, which was widely credited with boosting the Brazilian economy and the popularity of President Jair Bolsonaro.

That fiscal stimulus, however, unnerved investors as Brazil’s debt soared to more than 90 per cent of gross domestic product.

In the latter half of 2020, the yield curve for Brazilian sovereign bonds rose sharply as investors demanded higher premiums to lend longer term.

Analysts have expressed concern that Brazil’s public finances could deteriorate significantly this year if Bolsonaro spent to boost his popularity ahead of elections in 2022.

Such fears were exacerbated this week after a judge on Brazil’s top court annulled the graft convictions of Luiz Inácio Lula da Silva, the former president, potentially setting up the leftwing leader to challenge Bolsonaro in the polls.

The package passed on Friday allayed much of those worries due to its limited scope and because it did not break the country’s constitutionally mandated spending ceiling — a key fiscal anchor for investors. This was achieved by classifying many of the new expenses under “calamity” clauses, which are accounted for separately in the government’s budget.

Solange Srour, chief economist at Credit Suisse in Brazil, said that while the package did not cut government spending, the effect on debt to GDP was “very small”.

“This [bill] is important as a fiscal anchor, helping the government gain credibility despite spending more,” she said. “It is an anchor that makes the market continue to believe that spending will not get out of control.”

The fiscal question is particularly pressing because Brasília this year needs to refinance debt worth almost 20 per cent of GDP.

In recognition of the market nerves, Congress and the government included a number of so-called fiscal triggers in the latest aid package that would limit expenses for the federal government, legislative and judiciary.

“These triggers are harsh, but they are necessary so that there is no mistaken perception that the government is abandoning the trail of fiscal responsibility, even during this pandemic,” said Vitor Hugo, a lawmaker with the pro-government Social Liberal party.

“We believe that the government has to prioritise measures to contain spending and promote reforms and privatisation.”

Srour warned, however, that the package did not signify a “turnaround in fiscal policy in Brazil”.

“It is not enough to completely restore confidence,” she said. “You would need real spending cuts rather than just stopping expenditure from rising.”

Eduardo de Carvalho, a portfolio manager at Pacifico Asset Management in Rio de Janeiro, said the essential point for the Brazilian economy and the fiscal situation was the “evolution of the virus” in the coming months.

“If the virus gets worse in the next few months, the pressure to spend more will increase. Expenditures will arise again while growth is downgraded,” he said. But “if the current isolation measures put in place by local governments are successful in slowing the virus down and the vaccines keep arriving, it could be positive”.

De Carvalho added that it was also a “good signal” that Paulo Guedes, Brazil’s hawkish finance minister, was able to exert influence in the process, in particular regarding the fiscal triggers to limit expenditure.

The future of Guedes, a free-market economist, as finance minister has looked in doubt in recent weeks after Bolsonaro intervened to oust the head of state-controlled oil major Petrobras, sending tremors through the country’s economy.