Brazil's Real Declines as Economists Reduce 2016 GDP Forecast

  • Analysts in central bank survey see 2.67% contraction in 2016
  • Political crisis seen delaying measures to curb budget deficit

Brazil’s real fell to a six-week low on worsening prospects for the economy as President Dilma Rousseff fights attempts to impeach her.

The real dropped 0.1 percent to 3.8734 per dollar, its lowest level on a closing basis since Oct. 28, after earlier sliding as much as 1.3 percent.

The real is the worst performer this year among 31 major currencies as Rousseff struggles to find support for measures to reduce the deficit and avoid additional credit-rating cuts while her popularity plunges and the economy shrinks. Analysts in the central bank’s weekly survey expect Brazil’s economy to contract 2.67 percent in 2016, compared with a forecast for a 2.31 percent drop last week.

"The mounting political turmoil is definitely not helping the government to address the fiscal gap and is even dragging out the potential recovery further with the Brazilian real expected to remain under pressure," said Arnaud Masset, an analyst at Swissquote Bank SA in Gland, Switzerland.

Brazilians returned to the streets in nationwide protests on Sunday against Rousseff’s government as impeachment proceedings progress in Congress. Turnout at the demonstrations was smaller than in previous mass protests in August and March.

Moody’s Investors Service last week put the country’s Baa3 rating on review for a downgrade citing the challenges Rousseff’s government faces in shoring up fiscal accounts while a corruption scandal has Congress in gridlock. The ratings company said that a turnaround next year appears unlikely.

A second cut to junk could trigger a selloff of Brazilian assets by some institutional investors whose bylaws prevent them from holding such securities. Standard & Poor’s stripped Brazil of investment-grade status in September.

Economists in the central bank survey expect policy makers to increase the benchmark rate to at least 14.5 percent next year, compared with the previous week’s forecast of 14.25 percent.

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s interest rates, rose 0.06 percentage point to 16.05 percent.

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