The record rout in Brazilian bonds is deepening on speculation President Dilma Rousseff’s vow to boost spending to placate protesters will swell the budget deficit at a time when a stagnating economy saps tax revenue.
Brazil’s real-denominated bonds due 2023 have plunged this month, causing yields to jump to a 15-month high of 11.63 percent on June 21 even as the Treasury offered to buy back the notes in five unscheduled auctions this month. In the same span, the cost to protect its sovereign dollar debt against losses for five years soared to a 20-month high and exceeded that of lower-rated Turkey for the first time in seven years.
Rousseff, whose government recorded the biggest deficit in almost four years in April, urged fiscal restraint in a meeting with governors and mayors and then pledged to earmark 50 billion reais ($22 billion) more to upgrade urban transportation. Demonstrations that began over a bus-fare increase have drawn hundreds of thousands of protesters with calls for a halt to spending on soccer stadiums for next year’s World Cup tournament, an increase in funding for health care, education and public transportation and an end to corruption.
“It’s all about, ‘Let’s spend money on transport, let’s spend on this and that,’” Tony Volpon, the head of Americas research at Nomura, said in a telephone interview from New York. “That’s all fine and good, but where’s that money going to come from?”
Brazil’s budget shortfall widened to 132 billion reais in April, equal to 2.9 percent of gross domestic product and up from 103 billion reais a year before.
Finance Minister Guido Mantega said June 12 the country was ready to cut spending to meet its target for the primary surplus, which excludes interest payments, of 2.3 percent of GDP for 2013. The gauge fell to the equivalent of 1.9 percent of the economy in April after averaging 3.1 percent in the past decade.
Economists in a weekly central bank survey published yesterday cut their median forecast for growth this year to 2.46 percent from 2.49 percent. The economy grew 0.9 percent last year after expanding 2.7 percent in 2012.
Mayara Longo Vivian, a member of the Passe Livre movement that has helped organize the protests, said demonstrations will continue after Rousseff was unprepared to discuss concrete public transportation reforms in a meeting with members of the group yesterday. Following that meeting, Rousseff proposed a pact for fiscal responsibility, the first of five accords she put forth in discussions with governors and mayors.
She said in a post on the official presidential blog that fiscal restraint “is especially important at the current moment, when the prolonged global economic crisis is still punishing nations with volatility.” Rousseff also called for improved quality of health care, public transportation and education, and proposed a plebiscite to ask voters whether they support holding a constitutional assembly to overhaul the nation’s political system.
The Finance Ministry declined to comment in an e-mailed response to questions.
Rousseff is struggling to contain the largest demonstrations in Latin America’s biggest economy in two decades. Rio de Janeiro and Sao Paulo are among cities that have already relented to demands by protesters and scrapped increases in public-transport fares. Sao Paulo state Governor Geraldo Alckmin also said yesterday he’s canceling a toll-road increase.
The government exempted beans from import tariffs yesterday in a bid to cool inflation that accelerated to 6.67 percent through mid-June, above the 6.5 percent upper level of the central bank’s target range.
The tariff change follows a decision by the central bank to raise its target lending rate by 50 basis points, or 0.5 percentage point, on May 29 to 8 percent to curb inflation, surprising 38 of 57 economists surveyed by Bloomberg who had expected a second straight increase of 25 basis points.
Brazil’s Ibovespa stock index is down 24 percent this year, the worst performance among benchmarks in the 20 largest equity markets. The real has dropped 9.4 percent against the dollar in the past three months, the biggest decline among 24 emerging-market currencies tracked by Bloomberg. The government bought back 380 million reais of zero-coupon bonds yesterday to support the securities.
Rousseff’s fiscal policy is stuck between a “rock and a hard place,” Christopher Garman, Latin America director for Eurasia Group, said in a telephone interview from Washington. “How do you construct a political agenda that can be consistent with protester demands and overcome a crisis of confidence in the market place? Now the economy is her biggest vulnerability. The protests can further exacerbate a slowdown in private investment and jeopardize the recovery.”
Lackluster growth and rising debt levels are making it “more difficult to support” the positive outlook on Brazil’s Baa2 credit rating, which is two levels above junk, Mauro Leos, senior credit officer at Moody’s Investors Service, said in a June 19 phone interview from New York. Standard & Poor’s cut the outlook on its equivalent BBB rating for Brazil to negative on June 6.
Brazil’s gross debt was equal to 59.2 percent of GDP in March, close to a two-year high of 59.8 percent in November.
David Beker, an economist at Bank of America, says the government can still reach its primary surplus goal if it starts to receive revenue from concessions this year and is able to freeze more spending.
Rousseff said in August the government will sell licenses to build and operate 7,500 kilometers of roads and 10,000 kilometers of railways, requiring as much as 133 billion reais in investment over 30 years.
The government froze 28 billion reais in its 2013 budget to meet the primary surplus target, Mantega told reporters in Brasilia May 22.
“Their message of trying to bring the primary surplus from 1.8 percent to 2.3 percent this year is a good one,” Beker said. “They may need to freeze more spending to get it done.”
The government withdrew 12.4 billion reais from its sovereign wealth fund and discounted 34.9 billion reais in infrastructure investments to meet its target last year.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell 12 basis points to 258 basis points at 2:31 p.m. in New York, according to JPMorgan Chase & Co. (JPM)’s EMBI Global index.
The cost to protect Brazilian bonds against default for five years rose 68 basis points in the past month to 201 basis points, the biggest jump since late 2008. In May, Brazilian default swaps surpassed Turkey’s for the first time since 2006.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
Rousseff called on Brazilians last week to reciprocate the kind of hospitality the national squad for decades received abroad in the World Cup, calling violence related to the protests “embarrassing.” Protestors have demonstrated outside stadiums before games in the Confederations Cup, an international tournament being held in Brazil that in part serves as a World Cup rehearsal for the country.
FIFA Secretary General Jerome Valcke responded yesterday to street protests by saying the World Cup is creating thousands of jobs and “doing plenty of good things” for Brazil, which is spending almost 30 billion reais on infrastructure projects for the event.
A continuation of the protests would make it impossible for Rousseff to reach her primary surplus target, according to Pedro Tuesta, the second-most-accurate forecaster of the measure according to data compiled by Bloomberg.
“There were enormous doubts that the government would hit the target, even prior to all these protests,” Tuesta, a senior economist for Latin America at Washington-based 4Cast, said in a telephone interview. “The protests can increase the pressure to spend more. The protests make it almost a certainty that the government won’t meet its target.”
To contact the reporter on this story: Blake Schmidt in Sao Paulo at firstname.lastname@example.org