Brazilian Real Extends Fourth Monthly Decline as Deficit Widens

Brazil’s real extended its fourth straight monthly decline as part of a broad drop in emerging-market currencies after the government’s budget deficit widened in December to almost the widest since 2009.

The real fell 0.1 percent to 2.4128 per dollar at the close in Sao Paulo, extending its drop this month to 2.1 percent. Swap rates on contracts maturing in January 2015 declined three basis points, or 0.03 percentage point, to 11.60 percent, paring their increase in January to 102 basis points, still the biggest since the global financial crisis in 2008.

The real decreased as the government’s budget deficit grew in December to 3.3 percent of gross domestic product, compared with 3.4 percent in October, the widest in four years, the central bank reported. The primary surplus, excluding interest payments, was 1.9 percent of GDP last year, missing the government’s 2.3 percent target, which had been reduced from about 3.1 percent at the start of 2013.

“As emerging markets suffer from strong turbulence, it would be prudent for Brazil to signal a more austere primary surplus target for 2014,” Rafael Bistafa, an economist at Rosenberg Associados in Sao Paulo, said in a phone interview.

Swap rates climbed as a falling real added to speculation that the central bank will further raise borrowing costs to curb inflation after increases in other developing nations.

The real has fallen 7.2 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will erode demand for emerging-market assets.

Currency Concern

“There is a concern over the falling exchange rate as central banks in emerging markets are on a path of tightening,” Flavio Serrano, an economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a phone interview. “The exchange rate is at a level that could affect inflation.”

To bolster the currency and limit import price increases, the central bank sold $198 million of foreign-exchange swaps today under daily auctions announced Dec. 18. It also offered $2.3 billion of credit lines today and extended the maturity on the $11 billion of swap contracts maturing Feb. 3 after transactions this month.

A Bloomberg index of the 20 most-traded emerging-market currencies tumbled 3 percent in January, extending its decline over the past year to 10 percent.

India, South Africa and Turkey raised borrowing costs this week to support their currencies and curb inflation as the Fed pressed on with a reduction in a stimulus program that had supported developing-market assets.

Brazil’s central bank president Alexandre Tombini said this week that the nation is combating inflation in the context of a falling real. Policy makers raised the target lending rate by 50 basis points on Jan. 15 for a sixth consecutive time, increasing it to 10.50 percent.

To contact the reporter on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net

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