- Finance Ministry tells Folha Brazil may need to raise taxes
- Brazilian currency remains the world’s best-performer of 2016
Brazil’s real joined a slide in emerging markets on Monday as policy makers intervened to weaken the currency and economists cut economic forecasts amid uncertainty on budget plans.
The real weakened 0.9 percent to 3.2861 per dollar on Monday after the monetary authority placed 10,000 reverse currency swaps, equivalent to buying $500 million in the futures market. Policy makers revived the intervention program in March as the real posted the world’s biggest gains this year, dimming the outlook for exports, and have since sold $50.8 billion of the contracts.
The currency strengthened 23 percent in the first half amid optimism that the government of Acting President Michel Temer can trim the country’s budget deficit and restore confidence in its ailing economy. Temer’s economic team is seeking a $6 billion spending freeze as ministers and the president debate where cuts should fall. Brazil will eventually need to raise taxes if Congress doesn’t approve a bill to cap spending, Finance Minister Henrique Meirelles told Folha de S.Paulo newspaper.
“The government has not announced budget cuts and in fact spending is increasing, which will likely result in a larger deficit,” said Georgette Boele, an Amsterdam-based commodity and foreign exchange strategist at ABN Amro Bank NV. Meanwhile, “the central bank continues to dampen the real upside.”
The country will achieve its target for the fiscal deficit this year despite the recent increase in expenses and drop in revenues, Meirelles said.
Analysts surveyed by the central bank reduced their outlook for Brazilian gross domestic product this year to a contraction of 3.27 percent, versus a 3.25 percent recession predicted a week earlier. They expect the currency to weaken to 3.34 per dollar at the end of 2016.
Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, dropped 0.02 percentage point to 12.82 percent.