May 31, 2019 / 5:45 PM / 4 months ago

Brazil eyes fiscal boost as economy flirts with recession

BRASILIA, May 31 (Reuters) - Brazil’s government is looking at assembling a fiscal stimulus package worth around 20 billion reais ($5 billion) to revive flagging growth and prevent the economy from falling back into recession, sources told Reuters.

Stung by figures on Thursday that showed the economy shrank in the three months to March for the first time since 2016, the Economy Ministry may soon free up cash from workers’ guarantee funds, the sources said on condition of anonymity.

The FGTS funds, from employers’ contributions, serve as a buffer for employees, and can only be drawn from in certain circumstances such as buying a home, loss of employment or serious health problems.

Economy Minister Paulo Guedes said on Thursday that the government is looking at freeing up active and inactive FGTS accounts, but only after fiscal and economic reforms - namely pension reform - are approved and implemented.

Guedes is a deficit hawk committed to cutting public spending across the board. His mulling of a fiscal stimulus indicates the government’s sense of urgency on the economy.

Another quarter of negative growth would mark Brazil’s sixth recession in 20 years, although it may be significantly lighter and shallower than the bruising 2015-16 crash.

Analysts at ratings agency Moody’s Investors Service on Friday said the rebound from the 2015-16 recession is “the weakest cyclical recovery in decades,” noting private consumption and investment have been particularly weak.

Alberto Ramos, head of Latin American research at Goldman Sachs, went further, calling it the weakest recovery in history.

“After nine quarters into the current up-cycle the performance of the economy has been notably sluggish despite massive slack in terms of resource utilization, a strong external balance sheet, low inflation, and accommodative monetary and financial conditions,” he said.

Real gross domestic product, real GDP per capita, private consumption and capital spending are all significantly lower than their peaks before the recent crash, Ramos notes.

These structural headwinds to growth, together with shocks such as a Vale SA mining disaster in January and the slump in major export destination Argentina, have cast a dark cloud over the outlook.

Economists at Citi cut their 2019 GDP growth forecasts to 0.9% and Rabobank cut its forecast to 0.7% following first-quarter figures on Thursday, below the already weak market consensus of around 1.2%.

Guedes insists the economy will improve if Congress approves the government’s pension reform bill, which seeks to generate public savings of 1.237 trillion reais ($315 billion) over the next decade.

With that, investor, consumer and business confidence will return and the economy will “take off,” he has promised. (Reporting by Marcela Ayres and Jamie McGeever Editing by Brad Haynes and David Gregorio)

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