A drought that threatens to stretch Brazil's finances this year is making the government rethink its key fiscal goal, potentially paving the way for a smaller primary surplus target.
Just a few months ago, the government of President Dilma Rousseff was considering adopting a primary surplus target equivalent to at least 1.9% of gross domestic product, the savings result obtained in 2013.
But the rising energy bill caused by a severe drought has policymakers doubting that goal can be met, and some believe a lower target would be more achievable. No decision has been made yet on the 2014 target, which could be announced as soon as next week, the official said late on Tuesday.
The drought has sapped output at hydroelectric plants, forcing utilities to rely on more expensive thermal energy to secure supply. The government is considering assuming part of that cost to avoid passing that burden to consumers, which could push up inflation and stunt economic growth.
That extra cost, which has not been calculated yet, will hit fiscal accounts in an electoral year in which, analysts say, the government will be under pressure to spend more and have less resources available.
For Rousseff, who is expected to run for re-election in October, a robust, yet achievable fiscal goal is key to allay the threat of a credit downgrade and convince investors that she has not abandoned prudent fiscal policies.
A downgrade could further rattle financial and real economy investors already worried by the recent selloff in emerging markets triggered by a slowdown in the Chinese economy and a withdraw of monetary stimulus in the United States.
