Brazil's Real Weakens on Report Government Planning for Deficit

  • Country will revise this year's budget target for the 3rd time
  • Fitch Ratings lowered Brazil’s rating to the cusp of junk

Brazil’s real weakened on speculation the government will change this year’s budget target to a deficit from a surplus, highlighting its inability to shore up the country’s finances.

Officials will revise this year’s budget target for the third time, forecasting a deficit excluding interest payments of 0.3 percent of gross domestic product, worse than the current goal of a 0.15 percent surplus, according to a report by Folha de S. Paulo. The government is also expected to scrap plans to revive a tax on financial transactions, according to Valor Economico.

“Brazil continues to suffer from a negative feedback loop, linking a weak economy, fiscal slippage and rising credit risks,” Mark McCormick, a strategist at Credit Agricole CIB, said from New York. “The market is well aware the fiscal numbers are more a fantasy than reality, especially given the ongoing contraction in the economy.”

President Dilma Rousseff’s efforts to trim spending and raise taxes have met resistance from lawmakers concerned that the moves will hurt Brazil’s middle class. Fitch Ratings lowered Brazil’s debt rating to one level above junk Thursday, delivering the fourth downgrade under Rousseff’s watch, and said it could cut the grade again as government finances deteriorate.

The real dropped 1.1 percent to 3.8415 per dollar at 4:21 p.m. in Sao Paulo, ending two days of gains. It is down 2.1 percent this week.

Fitch’s downgrade comes as prospects worsen for Latin America’s largest economy amid persistent above-target inflation, forecasts for the longest recession since the 1930s and a rout in the country’s stocks and currency markets. Meanwhile, Rousseff is struggling to find supporters for her plans in Congress after her popularity fell to a record low, driven by a sweeping investigation into allegations of graft at the state-controlled oil producer. While she has reshuffled her cabinet earlier this month to try to gain lawmaker support for measures to revive the country’s finances, her low-popularity has spurred calls for an impeachment.

Fitch’s negative outlook captures Brazil’s political uncertainty, including chances of an impeachment, Senior Director Shelly Shetty said on a conference call. The ouster of the president could have negative rating implications for the sovereign as the process could distract the Congress from fiscal adjustment measures, Shetty said.

Standard & Poor’s cut the country’s credit rating to junk on Sept. 9, its second downgrade since Rousseff took office, while Moody’s Investors Service moved Brazil to the lowest investment grade in August.

Brazil’s economy shrank more than forecast in August. The economic activity seasonally-adjusted index, a proxy for gross domestic product, fell 0.76 percent in August from the prior month after a revised 0.01 percent fall in July, the central bank said Friday. The median estimate from 30 economists surveyed by Bloomberg was for a decline of 0.61 percent.

Goldman Sachs Group Inc. revised its forecast for Brazilian GDP to a 1.1 percent contraction this quarter, down from a previous estimate for a 0.6 quarterly shrinkage, citing weak leading and coincident activity indicators, record low levels of consumer and business confidence, and heightened macro and political uncertainty.

The economy is set to suffer headwinds from the highest interest rates in nine years, inflation and labor market deterioration, Alberto Ramos, the chief Latin America economist for Goldman Sachs, wrote in the report.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, rose 0.01 percentage point to 15.38 percent. They are still down 0.18 percentage point this week.

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