Brazil Real Leads Emerging-Market Declines After Fiscal Setback

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The real led emerging-market losses as Brazil’s Senate approved legislation that would raise government spending on salaries by $8.1 billion over four years in a fiscal disappointment for President Dilma Rousseff.

Lawmakers are pushing back against the administration’s effort to narrow the budget deficit as a shrinking economy and a mounting corruption scandal at the state-controlled oil company erode Rousseff’s popularity. Finance Minister Joaquim Levy has cautioned that failure to adopt the government’s belt-tightening measures may result in a sovereign-credit downgrade.

“There are social issues that need to be taken care of, and spending on salaries is one of them,” Ipek Ozkardeskaya, an analyst at London Capital Group, said by e-mail. “It’s about taking two steps forward, one step back, and the important thing is to take the right steps forward to justify the necessary step backward.”

The real slid 1.5 percent to 3.1492 per dollar at the close of trade in Sao Paulo, the worst performance among 24 developing-nation currencies. One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, remained the highest among 16 major tenders.

The local currency fell after the Senate passed a bill Tuesday evening that would boost pay for workers in Brazil’s judiciary system. Delcidio do Amaral, the government’s leader in the Senate, said Rousseff will veto the legislation, which has cleared the lower house. In May, Congress approved three measures to raise taxes and cut spending.

Ebbing Support

Rousseff’s popularity decreased in a June 18-21 poll conducted by Ibope amid forecasts Latin America’s largest economy is headed for a recession as well as concern over the scandal at Petroleo Brasileiro SA. The president’s administration approval rating on June 18-21 was 15 percent, compared with 19 percent in the previous poll in March, according to Ibope.

The real also weakened as turmoil in Greece damped demand for higher-yielding assets from emerging markets.

Brazil is prepared to handle the impact of global risk events because it’s “relatively comfortable” with the level of foreign-exchange reserves, Levy told reporters in Washington on Tuesday.

Swap rates rose as a member of Rousseff’s economic team with knowledge of monetary policy said the inflation outlook for 2016 would need to be below the 4.5 percent target and stay at that level for the following years to allow for an easing in monetary policy. The rate on the contract maturing in January 2017 increased 0.08 percentage point to 14.02 percent.

The central bank extended the maturity on 7,100 foreign-exchange swaps contracts worth $348.3 million Wednesday. It’s on pace to allow 30 percent of outstanding swaps to expire July 31, the same as the end of June.

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