Crisis-hit Brazil unveils $17 bn austerity package

Brasília (AFP) - Brazil announced a massive $17 billion austerity package Monday in a bid to boost its ailing economy amid a deepening crisis that already caused a downgrade of the country's credit rating.

The package -- announced at a news conference by Planning Minister Nelson Barbosa -- includes freezing public sector salary raises and hiring, entirely eliminating 10 of 39 ministries, cutting 1,000 jobs and slashing housing and health-related social spending.

"These are major corrections," Finance Minister Joaquim Levy said.

Just a few years ago, Brazil was in carnival mode as one of the BRICS group of emerging giants, winner of hosting rights to both the 2014 World Cup and 2016 Summer Olympics.

But the government of Latin America's largest country announced in August that the economy -- the world's seventh largest -- was officially in recession and that the contraction could extend through 2016, becoming the longest recession since 1931.

Last week's shock downgrade of Brazil's sovereign credit rating to junk status by Standard & Poor's sent the government scrambling to prevent an exit of foreign capital and to balance the books in an economy already suffering from plummeting commodity prices and the effects of a huge corruption scandal.

With deep recession, the country's first ever deficit budget, a corruption scandal of surreal proportions at state oil company Petrobras, and political paralysis, S&P didn't have to look far to justify its cut.

Brazil's score is now even lower than Russia's, which faces powerful Western sanctions over the war in Ukraine.

For the markets, news of the austerity measures was expected and not necessarily seen as being pro-growth.

"These are measures that are quite unpopular. And they are going to affect the support that (President) Dilma (Rousseff)'s government still has, especially among lower-income people," economist Felipe Queiroz told AFP.

"Austerity (makes sense) to maintain a budget surplus like the ratings agencies want, but that is going to contract economic activity even more," he said.

- Political price? -

After a weekend huddled with ministers, pressure piled on Rousseff to take action.

But the cuts in housing and health-related spending could erode the lower-income base of her governing Workers Party, analysts warn.

Rousseff succeeded her political mentor, former two-term president Luiz Inacio Lula da Silva. Now in power 12 years, but hard-hit by the global economic cooldown, the Workers Party is credited with lifting 40 million Brazilians out of poverty under Lula.

Yet Rousseff -- painted into a corner by recession, growing unemployment and surging inflation, plus corruption allegations against her government -- has seen her legacy as the first female Brazilian head of state take a body blow from public approval that has slid into the dark realm of single digits.

Rousseff had already ordered some $21.6 billion in spending cuts from this year's budget.

Yet she still ended up turning in a federal budget in the red for the first time.

The economic outlook is grim with GDP forecast to shrink 1.49 percent this year, according to the government. Market expectations are less optimistic -- for a shrinking of 2.55 percent.

The government is more than a little concerned other ratings agencies will follow the lead of Standard & Poor's.

Many Brazilians are quick to float the idea of a potential impeachment of Rousseff, 67.

But politically, that would be an uphill battle. She would have to be proven to have committed a crime or dereliction of duty. Even then, impeachment would have to be approved by two thirds of the lower house of Congress, in addition to special proceedings in the Senate.

Some of Brazil's most senior government officials and private sector executives, as well as a growing list of political figures, are among the dozens already tainted by the growing Petrobras scandal.

Their arrests brought the investigation closer to Lula and Rousseff. She was chairwoman of Petrobras during the main period of the corruption scheme but has not been accused of involvement.