Brazil Real, Stocks Little Changed as Investors Await Measures

Updated on
  • Acting president proposes spending cap to Congress leaders
  • Banco do Brasil falls as sovereign fund poised to sell shares

Brazil’s stocks and the real closed little changed as investors weighed whether acting President Michel Temer will be able to push through proposals to tame the widening budget deficit in Latin America’s largest economy.

The real closed near the lowest level in five weeks and the Ibovespa gained less than 0.1 percent amid speculation that Brazil’s woes will be difficult to overcome. Given the size of the country’s fiscal hole, the policy guidelines and “impressive” rhetoric are a welcome start, but are sure to run into a more difficult political reality in Congress, Neil Shearing, the chief emerging markets economist with Capital Economics, said in a report.

“There is willingness within the government to improve the country’s fiscal condition,” said Jefferson Rugik, a currency trader at brokerage Correparti Corretora de Cambio in Curitiba, Brazil. “But the path is far from being cleared.”

Brazilian assets rallied earlier Tuesday after Temer said he’ll ask Congress to limit subsidies and approve a cap on government spending. Stocks and the real have gained this year on speculation that the impeachment of President Dilma Rousseff would usher in a new government able to break the political paralysis that prevented the approval of measures to support growth and shore up the budget.

The real gained less than 0.1 percent to 3.5716 per dollar Tuesday. The Ibovespa closed at 49,345.19.

Banco do Brasil SA tumbled the most in seven weeks after Temer signaled a plan to end Brazil’s 2 billion-real ($564 million) sovereign fund, which is made up mostly of the lender’s shares. Kroton Educacional SA led gains in education companies. Petrochemicals producer Braskem SA jumped after Bank of America Corp. raised its recommendation to buy.

Improving fiscal accounts is key for the government after the country lost its investment-grade credit rating last year. Central bank data showed that the nation had a current account surplus of $412 million in April, compared with an estimated deficit of $900 million.

Temer’s proposal was announced a day after Budget Minister Romero Juca stepped down as a newspaper published a recording in which he appears to say the new government could halt a sprawling corruption probe. While Temer’s decision to remove Juca from the government will help avoid distraction as Congress votes on fiscal goals, the concern over political risks remains, analysts say. If a new target is approved by a large margin, it would signal strong support for the administration, Citigroup Inc. said in a note to clients.

The government’s measures to limit public spending, including a plan to overhaul the country’s costly pension system and improve economy productivity, are positive, said Alberto Ramos, a senior economist at Goldman Sachs Group Inc.

"This intention of embracing structural measures, instead of only transitory and short-term actions, is refreshing," Ramos said.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.04 percentage point to 12.87 percent.

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