April 29, 2019 / 10:31 PM / in 22 days

UPDATE 1-Brazil's public investment could evaporate to less than 0.5 pct of GDP

(Recasts; adds context, detail, quote)

By Jamie McGeever

BRASILIA, April 29 (Reuters) - Brazil’s public investment is grinding to a virtual standstill and could fall to a new record low below 0.5 percent of gross domestic product this year if the government is forced to tighten the squeeze on discretionary spending, the Treasury said on Monday.

The forecast accompanied figures that showed the central government’s primary deficit narrowed in March and over the first quarter, but which once again highlighted the precarious state of the country’s public finances.

Treasury Secretary Mansueto Almeida said the improvement so far this year was “temporary,” and warned that an uncertain revenue outlook coupled with onerous non-discretionary spending commitments such as social security could hit federal investment in 2019.

“We’re getting to a very critical level,” Almeida told reporters, noting that when discretionary spending is cut, the area that is often sacrificed the most is public investment.

Public investment in Brazil has been on a downward path for years, battered by the 2015-16 recession, from which the economy has still not fully recovered. This has forced governments to try and shore up the public finances by slashing spending, most notably via pension reform.

Since 2014, public investment has fallen 60 percent, Almeida said, a startling statistic for a country that invests little to begin with. It was 1.7 percent of GDP in 2014, and 0.7 percent of GDP last year.

Almeida noted that government revenues could suffer from the steep fall in the price of oil late last year, although crude has recovered some 40 percent this year. But Brazil’s economy is also struggling - some economists reckon it may even have shrunk in the first quarter - which will hit the tax take.

“The problem this year is not spending, but revenue,” Almeida told reporters.

Under the government’s fiscal rules, if it looks like revenues are going to undershoot forecasts the government will suspend or cut discretionary spending, often public investment.

In its first bi-monthly review of spending and revenue last month, the government said almost 30 billion reais ($7.6 billion) needed to be cut from ministries’ budgets this year. ($1 = 3.9442 reais) (Reporting by Jamie McGeever; Editing by Sandra Maler and Rosalba O’Brien)

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