Brazil Real Rises as Temer Wins Key Fiscal Vote in Lower House

Brazil Is Unraveling Before Our Eyes
  • Bill would affect 120 billion reais in spending requirements
  • Industrial production unexpectedly advances in April

Brazil’s currency rose after Acting President Michel Temer scored a victory in his effort to shore up the country’s finances following last year’s credit-rating downgrade to junk.

The real rose 0.2 percent to 3.5935 per dollar Thursday in Sao Paulo after the lower house overwhelmingly approved a bill that will ease budget constraints by reducing required spending. One-month implied volatility on the real fell 0.75 percentage point to 18.25 percent, the third-highest among major currencies tracked by Bloomberg.

"This was the first important litmus test for Temer’s team," said Mike Moran, the head of economic research for the Americas at Standard Chartered Bank. "Greater fiscal flexibility is a prerequisite for the tougher decisions on what to cut. I suspect those discussions will be less straightforward."

Brazilian assets are among the world’s best performers this year on speculation the new administration, which took over last month, would be able to curtail a growing budget deficit and help pull the country out of its worst recession in a century. To do that, Temer needs to find support in Brazil’s fractured Congress for measures to reduce spending and raise revenue.

The house voted 334 to 90 in favor of a proposal that eliminates spending requirements worth as much as 120 billion reais ($33.4 billion) through the year 2023. The bill still needs a second round of voting in the lower house before heading to the Senate.

Last month, lawmakers supported legislation that allows the government to post a budget gap before interest payments of 170.5 billion reais in 2016, rather than a primary surplus as proposed by the previous administration. Had lawmakers rejected the request, the administration would have been forced to drastically cut spending and shut many government services in order to meet the original goal.

Bullish investors also got a boost Thursday as Brazil’s industrial output unexpectedly rose in April. Production advanced 0.1 percent after a 1.4 percent jump in March, surprising all but one of the 37 economists surveyed by Bloomberg, whose median forecast was for a 0.9 percent drop. The industry data followed a smaller-than-expected contraction for the Brazilian economy in the first quarter.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.08 percentage point to 12.66 percent.

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