Hands Off Brazil’s Sovereign Fund for 2013 Possible Shortfall

Contending with a probable ratings downgrade derived from a narrowing 12-month primary budget surplus, Brazilian public officials are seeking new options. Brazil may not be able to reach the year-end budget savings target of 2.3% of gross domestic product – a lowered target from last year. Last week, the Banco Central do Brasil stated the 12-month public sector primary surplus slimmed to R$ 67.89 billion (US$ 29.14 billion) from R$ 74.1 billion.

This is important for Brazilian government bondholders because the primary surplus is used to pay down Brazil’s net public sector debt. Last year, the Fundo Soberano do Brasil (FSB), the sovereign wealth fund of Brazil, was used to cover the budget shortfall. R$ 12.5 billion was moved from the FSB to the National Treasury – some economists perceived it as a masking technique. On December 4, 2013, Brazilian Treasury Secretary Arno Augustin made it clear that the FSB will not be tapped to fund any possible shortfall in the meeting of the budget surplus target for 2013. Brazil’s sovereign wealth fund was intended for being a stabilization reserve for the budget and foreign exchange rates. In addition, the sovereign fund had the option to take strategic investments in Brazilian companies.

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