June 1, 2020 / 4:46 PM / a month ago

UPDATE 1-Brazil cannot rely on foreign funding in short term, says central bank chief

(New throughout, adds details)

By Jamie McGeever

BRASILIA, June 1 (Reuters) - Brazil cannot rely on foreign financing in the short term, central bank president Roberto Campos Neto said on Monday, citing the recent record capital outflow as the coronavirus crisis and investor jitters intensified.

In virtual testimony to lawmakers, Campos Neto also warned that emergency government spending to tackle the economic fallout from the coronavirus crisis must not be allowed to become permanent.

The central bank's ability to keep interest rates low is highly dependent on sound fiscal discipline and investors' faith in the government's fiscal credibility over the medium to long term.

Brazil posted a record portfolio outflow of $22.2 billion in March, and central bank figures last week showed a further $7.3 billion outflow in April. According to the Treasury, foreigners reduced their holdings of Brazilian bonds in April to the lowest since 2009.

"We had a huge outflow, more than the emerging market average. This sends a message that foreign financing is a variable that we cannot rely on in the short term," Campos Neto told lawmakers on Monday.

Campos Neto also said the economic outlook has deteriorated considerably since the bank's last policy meeting in May, which will be reflected in the bank's next quarterly inflation report later this month.

Economists now expect Brazil's gross domestic product to shrink by 6.3% this year, much more than the government's forecast of a 4.7% decline.

Campos Neto said the economy should start to rebound in the third quarter but some sectors of the services sector will take longer to recover.

In terms of further measures to boost lending and liquidity, Campos Neto said details of a loan program for banks worth 15-20 billion reais ($2.8-$3.7 billion) should be announced this week, while that details of the bank's emergency powers to buy private-sector assets and other new measures to make credit more easily available should also be announced soon.

$1 = 5.38 reais Reporting by Jamie McGeever Editing by Chizu Nomiyama and David Gregorio

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