UPDATE 1-OECD advises Brazil against more fiscal stimulus

Tue Jul 14, 2009 11:20am EDT
* OECD says no need for more fiscal stimulus in Brazil
* Sees Brazil economy shrinking 0.8 percent in 2009
* Expects rebound in 2010, with 4 percent growth
* Sees inflation stable at 4.2 percent in 2009, 2010 (Recasts, adds quote, details, byline)
By Ana Nicolaci da Costa
BRASILIA, July 14 (Reuters) - Brazil is already recovering from the global financial crisis but there is no need for additional fiscal stimulus unless activity weakens much further, the Organisation for Economic Cooperation and Development (OECD) said in a report on Tuesday.
Brazil's government has had an "appropriate" response to the crisis but should not implement any more anti-cyclical measures, the OECD said. Slowing economic growth and a series of tax breaks to hard-hit industries have led to a slump in tax revenues and some fear this could compromise the country's primary budget surplus for this year.
Investors view the primary budget surplus, which excludes interest payments, as a gauge of a country's ability to service its debt.
The government reduced its primary surplus target for this year to 2.5 percent of gross domestic product from 3.8 percent to free up cash for spending, but in the 12 months through May it already fell below that level to 2.28 percent of GDP.
The OECD expects Brazil to have a primary surplus of 2.3 percent of GDP this year.
The OECD is a Paris-based economic research organization, comprised of 30 governments, most of them from developed countries. It says Brazil may become a member of the group in the future.
In its its report, the OECD said: "Counter-cyclical fiscal action that would result in an increase in expenditure commitments on a permanent basis would be inconsistent with efforts to prevent a further ratcheting-up of current expenditure."
"The pace of monetary easing would also certainly be constrained if confidence in the fiscal program is eroded."
Brazil's central bank has reduced interest rates by 450 basis points since the beginning of the year to a record low of 9.25 percent and is widely expected to ease monetary policy further, albeit at a slower pace.
The government has also granted tax breaks to the automobile, construction and home appliance sectors, among others, to help boost spending and revive growth. The economy fell into recession in the first quarter of this year, contracting 0.8 percent after a 3.6 percent plunge in the fourth quarter of 2008.
Market analysts expect Brazil's economy, Latin America's largest, to shrink 0.34 percent in the latest weekly central bank survey. The OECD is more pessimistic, predicting a 0.8 percent contraction this year.
In 2010, however, the OECD expects the Brazilian economy to rebound, expanding 4 percent. In 2008, the economy grew 5.1 percent.
Inflation in Brazil is likely to rise 4.2 percent both in 2009 and 2010, below the government's annual inflation target of 4.5 percent, the report added. (Reporting by Ana Nicolaci da Costa, editing by W Simon)