Real, Stocks Climb as Brazil Aims for Lower 2017 Budget Deficit

  • Economic team will target budget gap of $42 billion next year
  • Government seeks to cut deficit after 2015 rating downgrades

Brazil’s currency rose and stocks climbed to the highest since May 12 after Finance Minister Henrique Meirelles said he would cut the budget deficit next year.

The real gained for the first day in six, strengthening 2 percent to 3.3 per dollar on Friday and trimming its weekly decline to 1.9 percent. The benchmark Ibovespa equity index added 2.2 percent to 53,140.74 as all but eight of its 59 stocks rose, posting a weekly gain of 1.7 percent.

The government will target a budget gap before interest payments of 139 billion reais ($42 billion) next year, Meirelles told reporters in Brasilia. That compares with this year’s target for a primary deficit no wider than 170.5 billion reais. Local media had speculated the so-called primary deficit target would be around 150 billion reais. The government of Acting President Michel Temer is trying to restore confidence in the country’s budget management after Brazil lost its investment-grade rating in 2015.

"The new target pleased the market," said Eduardo Longo, head of fixed income at Quantitas Gestao de Recursos SA. "Even though the numbers are bad in absolute terms, the most important aspect is the signal it gives that the economic team is strong within this administration."

Brazilian assets are among the world’s best performers this year on speculation the new administration 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.

For the first time this week, the central bank on Friday refrained from intervening to weaken the real. Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.09 percentage point to 12.69 percent.

Lenders Itau Unibanco Holding SA and Banco Bradesco SA contributed the most to the Ibovespa’s gains. State-controlled oil producer Petroleo Brasileiro SA and miner Vale SA followed commodities higher. Raw-materials producers have a 21 weighting in the gauge.

"The market feels much more confident now," Paulo Henrique Amantea, an analyst at Guide Investimentos in Belo Horizonte, Brazil. "The trend for stocks is positive."

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