Brazil Congress approves big budget gap in win for interim president

By Alonso Soto

BRASILIA (Reuters) - Brazil's government won congressional approval on Wednesday for the biggest fiscal deficit goal on record, in a victory for the new administration rattled by the resignation of a key minister initially charged with drawing up the goal.

In a raucous session that ran past midnight, the legislature accepted interim President Michel Temer's 2016 primary deficit goal of 170.5 billion reais ($47.4 billion), or 2.75 percent of gross domestic product.

It was the biggest-ever deficit goal of its kind, reflecting the anticipated difference between revenues and expenditures before interest payments. The primary deficit is a measure of creditworthiness closely watched by ratings agencies that recently stripped Brazil of its investment-grade rating.

The approval of the deficit goal averted budgetary deadlock which threatened a government shutdown in June, clearing a hurdle faced by Temer who took office in mid-May after President Dilma Rousseff was suspended to face trial on charges of breaking fiscal rules.

Finance Minister Henrique Meirelles said in a statement that the approval of the target signals the commitment of lawmakers to restoring the equilibrium of public finances.

The new deficit target, nearly double what Rousseff had projected, could open the way for more spending ahead of the October mayoral elections, a move that some analysts see bolstering Temer's support in Congress.

"The administration is taking a very pragmatic approach ahead of the October elections ... there will be a lot of political horse trading to approve other measures," said Sacha Tihanyi, senior emerging market strategist with TD Securities.

The measure passed despite the sudden resignation on Monday of Planning Minister Romero Juca, a leading member of Temer's economic team, over leaked recordings of him allegedly discussing plans to obstruct a huge graft probe.

The loss of Juca, the main political negotiator of the administration, was the first major blow to Temer after less than two weeks in power. He had been due to present the primary deficit target hours before he stepped down on Monday.

Investors fear Juca's exit could hamper efforts to pass key economic reforms in Congress and keep up political instability in a country mired in its worst recession in decades.

"The big picture is that it shows that this government is exposed to this corruption investigation that could hamper its governability and ability to pass measures in Congress," said Joao Pedro Ribeiro, analyst with Nomura in New York.

Temer, who was Rousseff's vice president, on Tuesday announced a raft of measures, including a constitutional amendment imposing a ceiling for public expenditures. Analysts believe more needs to be done to close a budget gap that could top more than 10 percent of GDP, including interest payments, for the second year in a row.

(Reporting by Alonso Soto; Editing by W Simon)

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