Brazil's Stocks, Real Lead World Gains on Spending-Cut Proposal

  • Government plans to cut $6.8 billion in spending next year
  • Lenders Itau, Bradesco rally; Vale slumps on China concern

Brazilian stocks and the real led world gains amid optimism government spending cuts will help shore up the budget and avoid another sovereign credit-rating downgrade.

Traders pushed the Ibovespa and the real higher after Finance Minister Joaquim Levy said the government plans to reduce 26 billion reais ($6.8 billion) in expenditures from next year’s budget in large part by capping salaries of civil servants and suspending exams for new entrants.

Finding ways to bolster the budget without waiting for lawmakers’ approval would mark a new strategy for president Dilma Rousseff’s administration, which has been struggling to win support for measures that would curb debt, tackle inflation and avoid more downgrades. S&P assigned a negative outlook to its rating when it cut the country to junk last week, meaning more cuts could be on the way. The ratings company said the political stalemate and repeated reductions in the government’s budget target have undermined the country’s creditworthiness.

“The spending cut number was seen as higher than many projections in the market" said Reginaldo Galhardo, a foreign exchange manager at Treviso Corretora de Cambio in Sao Paulo. While the currency and local stocks should face less pressure in the very short-term due to the announcement, Brazil’s problems are still deep, he said. "Volatility should remain quite high," he said.

The Ibovespa climbed 1.9 percent to 47,281.52 points, led by Itau Unibanco Holding SA and Banco Bradesco SA. Vale SA slumped with commodities as disappointing Chinese economic data added to concern the nation’s top trading partner is slowing further. The real gained 1.5 percent to 3.8154 per dollar.

The government will target a budget surplus excluding interest payments equal to 0.7 percent of gross domestic product in 2016, a sharp contrast from its previous estimate of a deficit equivalent to 0.5 percent of GDP.

Analysts surveyed by the central bank lowered their 2015 outlook for gross domestic product for the sixth straight week to a contraction of 2.55 percent this year, according to the median of estimates published Monday. They also expect Brazil to contract by 0.6 percent next year. That compares with previous estimates of declines of 2.44 percent and 0.5 percent, respectively. The analysts raised their 2016 inflation forecast to 5.64 percent from 5.58 percent.

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, dropped 0.22 percentage point to 14.93 percent.

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