Goldman Sachs Calls Out Brazilian Fiscal Imbalances

Brazil’s fiscal situation seems to be getting worse, and a major fiscal overhaul may be the only way to fix it. According to the latest numbers out of Brazil, the nations primary fiscal deficit continues to widen.
Goldman Sachs analyst Alberto Ramos recently discussed Brazil’s situation and what the country needs to do to right the ship.

Gross national debt in Brazil is tracking at 67.5 percent of GDP, up from 66.5 percent in 2015. The 12-month trailing implicit interest rate on net public debt is now a staggering 26.1 percent.

“We expect the performance of subnational government to deteriorate visibly in the months ahead given the tightening budgetary pressures,” Ramos notes.

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Goldman believes that Brazil needs a large, permanent fiscal adjustment that results in 3.0-3.5 percent primary surplus is needed to restore balance in Brazil.

“Furthermore, we believe a deep fiscal adjustment that would elevate public sector savings is needed to facilitate permanent structural current account adjustment (rather than just a cyclical adjustment driven by the sharp contraction of domestic demand), and also to endow the central bank with extra degrees of freedom to set monetary policy at a less-restrictive level,” Ramos concludes.

So far this year the iShares MSCI Brazil Index (ETF) EWZ is up 23.7 percent.

Disclosure: the author holds no position in the stocks mentioned.