Brazil Real Declines as Budget Deficit, Fed Concern Sink Demand

The real fell to a two-month low on concern Brazil isn’t doing enough to curb its budget deficit and as speculation mounted that the Federal Reserve will begin curtailing stimulus.

The currency dropped 0.3 percent to 2.3133 per dollar at the close in Sao Paulo, sliding to the lowest level since Sept. 5 and extending its weekly decline to 2.6 percent. Local bonds fell, pushing yields on debt maturing in 2023 up nine basis points, or 0.09 percentage point, to 12.43 percent, the highest since the securities were sold in March 2012. The yields climbed 55 basis points for the week.

The budget deficit swelled in September to the largest since 2009, prompting plans by the government to eliminate tax breaks on consumer goods to shore up public finances. Standard & Poor’s may lower the nation’s rating sooner if the government allows more fiscal deterioration, Regina Nunes, managing director in Brazil at the company, said in an interview.

“The fiscal problem is generating a lot of doubts,” Alfredo Barbutti, an economist at BGC Liquidez DTVM in Sao Paulo, said in a telephone interview. “And the focus is also on what the Fed will do.”

The real has tumbled since Oct. 31, when the government reported that the budget deficit increased in September to 3.3 percent of gross domestic product, the largest in four years.

Brazil needs to focus exclusively on fiscal issues and investment as S&P evaluates the nation’s BBB credit rating over the next 24 months, Nunes said in the interview.

Ratings Outlooks

S&P and Moody’s Investors Service lowered their outlooks this year on Brazil’s rating, which both companies put at two levels above junk.

The government will eliminate tax breaks on consumer goods and end a program to stimulate exports to curb deficits, Treasury Secretary Arno Augustin said yesterday.

“We are used to dealing with the markets’ complexity and moods,” Augustin said at his office in Brasilia. The government must “react with calm, seek to inform and undo possible misunderstanding and continue with the policies it believes will deal with the negative circumstances.”

The central bank auctioned $1 billion of credit lines today as part of a $60 billion intervention announced Aug. 22 to support the currency and curb import price increases. Brazil may extend the program beyond December, Carlos Hamilton, the central bank’s economic policy director, said this week.

Traders added to speculation that the Fed will reduce asset purchases supporting the economy after a report showed U.S. employers added more jobs than forecast in October.

Payrolls in the U.S. increased by 204,000, following a revised 163,000 gain in September that was larger than initially estimated, Labor Department figures showed today in Washington. The median forecast of 91 economists surveyed by Bloomberg called for a 120,000 advance.

Swap rates on the contract maturing in January 2016 climbed six basis points to 11.80 percent today, extending their increase this week to 38 basis points.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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