Brazil Real Extends Worst Monthly Drop Since March on Fiscal Woe

Updated on

The real fell to a 12-year low and extended its biggest monthly decline since March as budget reports added to concern that Brazil will be lowered to junk.

Standard & Poor’s cited a slowing economy and fiscal turmoil Tuesday when it changed its outlook to negative on the nation’s credit rating, already at the lowest level of investment grade. The central bank signaled the following day it will avoid further increases in interest rates, limiting the desirability of the nation’s assets to global investors looking for higher yields.

The real dropped 1.5 percent to 3.4214 per dollar at the close of trading Friday, the weakest level on a closing basis since March 2003. It has fallen 9.3 percent in July, the worst performance among 16 major currencies.

“Perception regarding Brazil has deteriorated further,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview.

The central bank reported Friday that Brazil’s budget deficit before interest payments deepened to 9.3 billion reais ($2.7 billion), compared with a shortfall of 5.4 billion reais forecast by analysts surveyed by Bloomberg.

Last week Finance Minister Joaquim Levy cut his goal for a budget surplus before interest payments to 0.15 percent of gross domestic product from 1.1 percent.

S&P rates the nation at BBB-, the lowest level of investment grade. Moody’s Investors Service, whose ranking for Brazil is one level higher, put the nation on negative outlook in September.

Analysts’ Forecast

The government’s failure to meet fiscal goals, the worst economic contraction in 25 years and President Dilma Rousseff’s sinking popularity amid a corruption scandal have caused the real to fall to a level that wasn’t forecast by analysts surveyed by Bloomberg until the end of next year.

The real extended its drop in 2015 to 22 percent, the worst performance among 31 major currencies. Also weighing on the local tender is the prospect of reduced demand for exports in China and an expected increase in U.S. interest rates by the Federal Reserve.

“I would stay clear of Brazilian assets for the time being,” Nicholas Spiro, a managing director at advisory firm Spiro Sovereign Strategy, said by telephone from London. “There is too much downside with this increasingly bleak and grim domestic backdrop.”

Swap rates, a gauge of expectations for changes in borrowing costs, fell 0.09 percentage point to 13.43 percent on the contract maturing in January 2017, extending their monthly decline to 0.51 percentage point.

While the central bank increased the target lending rate Wednesday to an eight-year high of 14.25 percent, it changed the language in its statement to say that “holding that interest rate level for a sufficiently prolonged period is necessary for the convergence of inflation toward the target at the end of 2016.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE