Brazil’s finances are set to deteriorate substantially next year, leaving the government with few options to revive a sputtering economy and raising the threat of a credit downgrade.

The government is likely to miss its key 2014 budget target, the primary surplus, by as much as 50 billion reais ($22 billion), delivering only about half its goal, estimates by Reuters and private economists show.

Unlike most other countries, Brazil’s most-watched budget goal strips out interest payments on its debt, meaning its overall deficit would widen if the primary surplus dwindles.

Such an event could deal a major setback to Latin America’s biggest economy, which won its investment-grade credit rating in 2008 through a commitment to fiscal responsibility and strong economic growth.

Growth, however, has slowed sharply since 2011, and President Dilma Rousseff has unleashed costly tax breaks and credit subsidies in response.

The strategy has not only failed to support the economy, but also has exacerbated Brazil’s fiscal woes. Meanwhile, with Rousseff expected to enter a hotly contested run for a second term next year, she is unlikely to make major spending cuts because they could anger her fragile political coalition.

A credit downgrade, already priced in by credit default swap markets for mid-next year, would put Brazil’s rating just one notch above junk status, making government and corporate borrowing more expensive and further eroding economic growth.

A downgrade could also complicate efforts to curb inflation by triggering further weakness in Brazil’s currency, which has lost 10 percent of its value against the dollar this year.

Reuters spoke to analysts at two ratings agencies who highlighted the risks imposed by Brazil’s slow economic growth at a time when there is little room for additional stimulus.

“We recognize that even though there is some room for countercyclical fiscal policy in Brazil, that room is actually very limited,” said Sebastian Briozzo, a director with Standard& Poor’s, which placed a negative outlook on Brazil’s BBB credit rating in June.

“Between this year and next, this is what we will be evaluating for the rating outlook to see how it is resolved,” he said.

The government still says it will meet its target for a primary surplus of 2.1 percent of gross domestic product, but it is relying on projections that most economists think are wildly optimistic.

The primary surplus is the government’s excess revenue before interest payments on its debt.

While most analysts expect Brazil’s economy to grow about 2.3 percent in 2014, in what would be a fourth consecutive year of mediocre expansion, Rousseff’s government projected growth of 4 percent when preparing next year’s budget.

The government’s growth forecast resulted in an overly optimistic estimate for tax collection, which in turn allowed authorities to justify a more than 10 percent expansion in public expenditures next year.

The picture looks different when the forecast economic growth rate is changed.

By projecting the increase in revenues for next year given the GDP growth rate expected by private economists, including provisions for inflation, Reuters found that the government’s projected primary surplus would fall short of what authorities are expecting.

Private economists including Felipe Salto, professor at Fundacao Getulio Vargas, and Catarina Braga, analyst at MCM Consultores, had similar conclusions.

Asked about the gap between official and private forecasts, Brazil’s Finance Ministry reiterated its estimates. Last month, Finance Minister Guido Mantega said that current government forecasts for the primary surplus would be revised early next year, which could lead to budget freezes.

Unrealistic Goal

Rising public spending was part of Rousseff’s big policy bet for 2013: that Brazil, which required a bailout by the International Monetary Fund bailout in 1998, had matured enough for investors to accept single-digit interest rates and less austerity.

Her government has changed tack since S&P issued its warning, but economists say none of the improvements so far – such as a 10 billion reais budget freeze announced in July— has been a game-changer.

Even if the economy does not slow as expected next year, the budget goal will likely remain unrealistic. Brazil’s government has overestimated one-off revenues from toll road and airport concessions, economists said, while underestimating the spending likely to be made by states and cities in an election year.

The government already lowered its closely watched goal for the primary surplus, from 2.3 percent of GDP, to the current 2.1 percent projection, though some economists said it was mostly a half-hearted attempt by policymakers to be more transparent after years of relying on accounting tricks to meet the target.

Private forecasts suggest Brazil’s government won’t even come close to its goal next year, with Barclays projecting a primary surplus of only 1.1 percent of GDP.

Analysts are also monitoring Brazil’s recent intervention in currency markets as it tries to support the real after it reached nearly five-year lows. Brazil’s central bank has so far kept the door closed on its vault of $370 billion in foreign reserves, but may need to open it in the next few months if investors continue to lose faith in the country’s slow-growing economy.

“A severe loss of international reserves and/or deterioration in government debt composition could also put pressure on the rating,” Shelly Shetty, head of Latin America Sovereigns at Fitch Ratings, wrote in an email.

Moody’s Brazil analyst Mauro Leos, who rates Brazil as Baa2 with a positive outlook, was not available to comment.

However, a potential change in outlook by Moody’s in the second half of the year will be “a key event to focus on,” David Beker, chief Brazil economist for Bank of America Merrill Lynch, wrote in a recent investor note.

In a July speech, Rousseff said her government remained committed to fiscal responsibility, telling ministers and business leaders: “The principle is that we can only spend what we have, so we don’t compromise our fiscal balance.”

But many analysts and investors may need more convincing.

“This government is never going to make a strong fiscal adjustment,” said Waldemir Quadros, an economics professor at Pontificia Universidade Catolica in Sao Paulo who specializes in public finances. “Forget it.”