MercoPress. South Atlantic News Agency

Brazil presents 2016 budget and Real drops to a 12-year low against the dollar

The budget plan calculates inflation of 5.4% next year and anaemic GDP growth at 0.2%.

Brazil's government presented a 2016 budget Monday that for the first time projects the world's seventh largest economy operating in the red, sparking worries that the country's investment grade rating will be put at risk.

 Embattled President Dilma Rousseff's government delivered the proposed budget to Congress predicting a primary deficit amounting to 0.5% of GDP, or 30.5 billion Reais ($8.4 billion).

The budget plan calculates inflation of 5.4% next year and anaemic GDP growth at 0.2%. This was the first time a Brazilian government has delivered a plan that would mean government spending outstripped receipts.

The news follows last week's prediction that Brazil has just entered the worst recession since 1931 and a host of other downbeat economic news, coupled with political turmoil. Markets fell sharply to the new blow.

The Real, which has already lost 26.61% of its value against the dollar this year, hit a 12-year low on the news, down 1.1% to 3.627 Reais to the dollar. The Sao Paulo stock market lost 1.12%.

A primary budget reflects the government's ability to manage savings and debt. The worry for Brazil now is that its debt load will lead to a loss of its investment-grade credit rating, which would be a serious blow to the economy.

The acknowledgment that Brazil cannot balance its books followed the government's abandonment in the face of Congressional opposition of a plan to bring back and unpopular tax on financial transactions. Cutting spending is also tricky, given the political damage that austerity measures have already caused Rousseff's weak government.

But Finance Minister Joaquim Levy was confident, saying “the equation in Brazil has a solution”. He added “it's an equation of growth, which is resolved through cooperation, dialogue and political will”.

Brazil saw boom years peaking with 7.5% economic growth in 2010, but Latin America's biggest country, the host of next year's Summer Olympics, has been brought down by plunging commodity prices and political instability.