Brazil’s Real Falls Most in Three Years on Record Budget Deficit

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Brazil’s real declined the most in three years as the budget deficit widened to a surprise record in September, adding to speculation that the Latin American nation’s credit rating will be reduced.

The real weakened 3 percent to 2.4778 per dollar in Sao Paulo in the biggest drop since September 2011 and leaving the currency down 1.3 percent in October. Swap rates, a gauge of expectations for changes in borrowing costs, increased eight basis points, or 0.08 percentage point, to 12.24 percent on the contract due in January 2016. They are up 29 basis points this month.

“The expectations for budget numbers were not good, but they came in much worse than thought,” Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo, said in a telephone interview. “We know it’s basically impossible to meet fiscal targets this year, and that is definitely a major concern.”

The real fell as the newly re-elected President Dilma Rousseff faced the challenge of pulling Brazil out of recession, slowing above-target inflation and stemming deficits that threaten the country’s investment-grade status. One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among 16 major currencies tracked by Bloomberg.

Brazil’s budget deficit widened last month to 69.4 billion reais, more than twice the median forecast in a Bloomberg survey of six analysts. The shortfall was the biggest since the series of data began in December 2001.

“Investors are worried,” Luiz Eduardo Portella, a trader and partner at Modal Asset Management in Rio de Janeiro, said in a telephone interview.

Growth Outlook

Treasury Secretary Arno Augustin told reporters today that Brazil will resume growth in 2015 and that he doesn’t believe the credit rating will be reduced.

Standard & Poor’s downgraded Brazil in March for the first time in more than a decade to the lowest level of investment grade because of slower growth and what it said were deteriorating fiscal accounts.

Brazilian swap rates posted a monthly increase after only one of 54 economists surveyed by Bloomberg correctly forecast the central bank’s decision Oct. 29 to raise the target lending rate by a quarter-percentage point to 11.25 percent. Policy makers said in their statement that the move would reduce the cost of ensuring an improved inflation outlook.

To support the real, the central bank sold currency swaps worth $197.5 million today as part of an intervention program begun last year.

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