Brazil Does the Bare Minimum

02/10/2011 3:09 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The Brazilian government announced $30 billion in proposed spending cuts yesterday, February 9.

That was the minimum the government could pledge and not disappoint financial markets that are looking for the government to make budget cuts that would help the central bank fight inflation that hit 5.99% in January.

But there’s nothing in the announcement—no bold move—that will change the current belief that interest rates will go up to 11.75% next month (from 11.25% now) or that they’re headed to 13% by the end of 2011. The Banco Central do Brasil raised its benchmark Selic rate to 11.25% from 10.75% in January.

The central bank was hoping for cuts that would raise the primary budget surplus to 3% of GDP. (The primary surplus is the budget surplus, if any, before government interest payments.) The proposed cuts would result in a primary surplus of 2.9% and would remove all stimulus added in 2009 and 2010 to increase economic growth during the financial crisis, finance minister Guido Mantega said.

Of course, there’s the little matter of actually getting the cuts through Brazil’s legislature. Newly elected President Dilma Rousseff has taken a hard line on delivering the cuts, putting her government’s credibility at stake. For instance, she has so far refused to budge on the government’s proposal to lift the minimum wage by 6.8% this year to 545 reals. Unions are pushing for an increase to 580 reals or more.

Brazil’s economy grew at a 7.3% rate in 2010.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.

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