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Brazil Real Closes at Two-Month Low on Budget Deficit Concern

Nov. 12 (Bloomberg) -- Brazil’s real closed at a two-month low as concern that the government’s budget deficit will lead to a reduced credit rating overshadowed efforts by the central bank to support the currency.

The real depreciated less than 0.1 percent to 2.3321 per U.S. dollar in Sao Paulo, the weakest level since Sept. 4. Swap rates on contracts maturing in January 2015 fell five basis points, or 0.05 percentage point, to 10.96 percent.

The central bank began auctions to extend the Dec. 2 maturity on $10 billion of foreign-exchange swaps that were sold to support the currency and curb import price increases, rolling over $988 million today. Policy makers scheduled the offering three weeks before maturity, twice the time that was given for contracts that came due at the beginning of November.

“Brazil has the intervention plan in place,” Win Thin, the global head of emerging-market strategy at Brown Brothers Harriman & Co. in New York, said in a telephone interview. “I expect them to roll over the entire amount. That would signal they don’t want the real at these levels.”

The real has fallen 4 percent since Oct. 31, when the government reported that the deficit as a percentage of gross domestic product was the largest in almost four years. The drop in the currency is the biggest among major Latin American dollar counterparts tracked by Bloomberg.

A person on the government’s economic team who asked not to be identified because discussions aren’t public said the federal government is working to pass a bill this year that would exempt it from having to compensate when states and cities miss primary fiscal surplus targets, which exclude interest payments. The Finance Ministry’s press office declined to comment.

S&P Rating

Standard & Poor’s may reduce Brazil’s BBB credit rating if fiscal accounts worsen, Regina Nunes, a managing director at the company, said in an interview last week. 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.

Earlier today, the central bank sold $497.5 million of currency swaps as part of the $60 billion intervention program announced Aug. 22 to support the real.

Brazil has raised the target lending rate to 9.50 percent from a record low 7.25 percent this year, the most among 49 nations tracked by Bloomberg, to cool consumer demand and hold down prices.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

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

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