Brazilian Real Posts Quarterly Gain on Signs of Budget Progress

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Brazil’s real posted its first quarterly gain in a year as President Dilma Rousseff made progress in winning political support for her effort to shore up fiscal accounts and preserve the nation’s credit rating.

Finance Minister Joaquim Levy has pressed lawmakers to pass measures designed to produce a budget surplus before interest payments, following a deficit last year. In late May, Congress approved three measures to raise taxes and cut spending. Budget challenges, however, remain six months into Rousseff’s second term.

“Levy deserves credit for working hard to improve investor perception regarding Brazil,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview. “Of course, there is still a long way to go to improve the fiscal situation, but nobody can say Levy is not trying.”

The real climbed 0.5 percent to 3.1030 per dollar in Sao Paulo, extending its gain since March 31 to 3 percent, the first three-month increase since the second quarter of last year.

The government got a boost when Standard & Poor’s affirmed Brazil’s investment grade in March after lowering the nation’s credit rating last year for the first time in more than a decade.

“Precisely because of the fiscal adjustment -- albeit modest, nothing radical -- we managed to avert the risk of downgrade,” Levy said June 12.

Moody’s Investors Service cited a stalled economy and budget challenges when it put the nation on negative outlook in September. S&P rates Brazil at the lowest level of investment grade while Moody’s ranks it a step higher.

Budget Shortfall

A budget report Tuesday indicated that Rousseff and Levy still face challenges. As slower growth eroded tax collection, federal and local governments posted the widest budget shortfall before interest payments of the year last month. The so-called primary deficit was 6.9 billion reais ($2.2 billion), compared with the median estimate of economists surveyed by Bloomberg, which called for a gap of 7 billion reais following a surplus of

13.4 billion reais in April.

The primary deficit as a percentage of gross domestic product over 12 months narrowed to 0.68 percent, compared with the government’s goal of posting a surplus equal to 1.1 percent this year. Levy said last week that the government could take other steps after media reports indicated that it would cut the surplus target.

Morgan Stanley recommended buying the dollar when it falls to 3.08 reais and holding it until it rallies to 3.30 reais, a level last reached in March.

‘Further Depreciation’

“Brazil has started a difficult but necessary adjustment with long-term potential positive implications and opportunities for investors,” Morgan Stanley’s Felipe Hernandez and Dara Blume wrote in a research report to clients. “However, for those looking at the real, we recommend positioning for further depreciation in the near term.”

Swap rates, a gauge of expectations for changes in borrowing costs, dropped 0.08 percentage point to 13.94 percent on the contract maturing in January 2017, paring their quarterly increase to 0.56 percentage point.

The central bank said Tuesday that Brazil is planning to extend the maturity on 7,100 foreign-exchange swap contracts daily starting July 1. If there is no change to the rollover pace in July, and no rollover auctions are held on the last day of the month, which is typical, about 30 percent of outstanding swaps will expire July 31.

The percentage is the same seen this month, although the central bank started June with daily auctions signaling 20 percent of the outstanding contracts would be left to expire, increasing the amount later.

Valor Economico reported that central bank director Tony Volpon said on a conference call with analysts that the decision on swap rollovers was based on market conditions and that officials aren’t trying to influence the real’s level.

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