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Brazil’s Budget Deficit Continues to Worsen

David Ashworth

Rousseff Faces Impeachment as Brazil's Economic Situation Worsens

(Continued from Prior Part)

What’s a budget deficit?

A budget balance is a snapshot of the financial health of a government. It’s the difference between total receipts and total expenditure of a government in a year. If receipts equal expenditure, the budget is said to be balanced. If receipts exceed expenditure, there’s a surplus, and if expenditure exceeds receipts, there’s a deficit.

Brazil’s budget balance

Brazil’s primary budget balance was in a surplus equivalent to 2.1% of GDP (gross domestic product) in 2011. However, it reduced for two successive years and became negative in 2014. According to the latest reading, Brazil’s budget deficit for the 12 months through October 2015 was 0.7% of GDP.

The primary budget deficit rose to 11.5 billion Brazilian real in October, the worst on record. In contrast, the balance was in a surplus of 3.7 billion real just a year ago in October 2014.

An indebted nation

The Brazilian government’s net debt, which excludes net debt of banks and public enterprises, was equivalent to 36.3% of GDP, compared to 34.7% at the end of 2014. Meanwhile, the government’s gross debt was equivalent to 66.1% of GDP, compared to 58.9% at the end of 2014.

Though this may not seem as high as debt in Japan, debt servicing is a big issue. Remember that Brazil is in stagflation, which means low economic growth and high inflation, while Japan is experiencing deflation.

To counter inflation, interest rates have been kept high in Brazil, while in Japan they remain at a very low level. The money market interest rate in Brazil is over 14% annually.

Impact on investors

Generally, broad government finance indicators do not impact investments. However, Brazil’s case is different. The macroeconomic picture has seriously hurt investor sentiment.

For investors looking to invest in the region via the mutual fund route through funds such as the Aberdeen Latin American Equity A (ALEAX), which is invested in Embotelladora Andina (AKO.A), Banco Santander-Chile (BSAC), Tenaris (TS), and Bancolombia (CIB) among others, this is not the best time. Bottom-up stock selection will begin to show results when there is some semblance of political and economic stability.

Speaking of economic stability, let’s see how the country’s economic growth is doing in the next article.

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