UPDATE 3-Brazil to raise primary surplus for sovereign fund

Fri May 30, 2008 6:16pm EDT
(Adds Meirelles' comment, paragraph 7)
SAO PAULO, May 30 (Reuters) - Brazil will increase its primary budget surplus by at least 0.5 percent of gross domestic product to help finance a new sovereign wealth fund, Finance Minister Guido Mantega said on Friday.
Speaking a day after Brazil won its second investment-grade credit rating, Mantega said the fund would start off with 13 billion reais ($8 billion) in assets, all in local currency, though at a later date the government could also buy dollars for the fund.
Mantega also said the additional savings from the increased primary surplus will help in the battle against inflation, easing pressure on the central bank to raise interest rates.
"If spending is high, monetary policy is conservative. Now it will demand less from monetary policy," Mantega told reporters in Sao Paulo, Brazil's business capital. "Monetary and fiscal policy are going to work hand-in-hand to contain inflation."
Brazil's central bank has long sought to control inflation by raising interest rates, a policy that often irks some government officials and business leaders.
Central bank chief Henrique Meirelles praised the initiative to boost savings in the public sector, saying in a statement it should help "accelerate the reduction the debt-to-GDP ratio and safeguard the financial balance of the state throughout the economic cycle".
Fitch Ratings, after upgrading Brazil, Latin America's largest economy, to an investment-grade rating on Thursday, had urged Brazil to raise its fiscal surplus to help fight inflation and rely less on interest rates. The ratings upgrade by Fitch came one month after a similar move by Standard & Poor's.
Despite recent media reports suggesting that President Luiz Inacio Lula da Silva was reluctant to move ahead with the plans for the sovereign wealth fund, Mantega said the bill to create it would be sent to Congress next week.
Brazil currently has a primary budget surplus target of 3.8 percent of GDP. Investors closely watch the primary budget surplus, which excludes interest payments on debt, as a gauge of the government's commitment to fiscal prudence.
"In reality, this represents an increase in the primary surplus target and that should improve the inflation outlook for 2008," said Alexandre Lintz, chief strategist in Brazil for BNP Paribas.
"This is positive. It shows that the government is not sitting still," he added.
Brazil's tax revenues have soared to one record after another so far this year, thanks to a booming economy, putting pressure on the government to formally increase the primary surplus to save for an eventual slowdown.
Mantega said the government was already taking advantage of the increase in revenues to save more. Indeed, in the 12 months through April Brazil's primary surplus was equal to 4.23 percent of GDP.
"One day, when economic activity eases, we'll have the funds to prevent the economy from slowing down," he said. ($1=1.626 reais) (Reporting by Aluisio Alves and Silvio Cascione; Writing by Todd Benson; Editing by Kenneth Barry and Leslie Adler)