Brazil Real Drops on Concern Rousseff Pledges Will Widen Deficit

Brazil’s real fell, posting its biggest quarterly decline in a year, on concern President Dilma Rousseff’s attempt to placate street protesters will widen the government’s budget deficit.

The currency slid 1.5 percent to 2.2317 per dollar in Sao Paulo. The quarterly drop deepened to 9.4 percent, the worst performance among major emerging-market currencies tracked by Bloomberg. Swap rates on contracts due in January 2016 climbed 21 basis points, or 0.21 percentage point, to 10.66 percent, swelling the increase since the end of March to 163 basis points.

The real earlier today pared its decline after the central bank sold foreign-exchange swap contracts worth $3.98 billion in two auctions to stem the currency’s two-month rout. Brazil’s budget deficit almost doubled to 14.5 billion reais in May from 7.7 billion reais in the prior month, the central bank reported today. Rousseff pledged 50 billion reais to improve urban public transportation when she met with protest leaders June 24.

“There’s a lot of people that have been concerned about the fiscal stance in Brazil,” Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia, said in a telephone interview from Toronto.

On July 1, the government plans to increase an excise tax on home appliances and furniture that was reduced in 2011 and 2012 to boost consumer spending.

The tax on refrigerators will rise to 8.5 percent from 7.5 percent while the tax on furniture will climb to 3 percent from 2.5 percent, Finance Minister Guido Mantega told reporters yesterday. The tax increases will bring in an additional 118 million reais over the next three months, he said.

Mantega Stance

“We have to improve our revenue, improve our fiscal performance, so no new tax breaks are expected,” Mantega said.

Rousseff has also proposed a plebiscite on political reform to listen to the “voices of the streets.” Such a vote may cost 500 million reais, Estado de S. Paulo reported, citing estimates by unidentified electoral officials. A presidential press official declined to comment when contacted by Bloomberg News.

Brazil’s ruling party is reviving a proposal to tax millionaires to help pay for improvements in public services that protesters are demanding, Candido Vaccarezza, a lawmaker, said in a telephone interview.

Rising debt levels and lackluster economic growth are making it “more difficult to support” the positive outlook on Brazil’s Baa2 credit rating, which is two levels above junk, Mauro Leos, a senior credit officer at Moody’s Investors Service, said in a June 19 telephone interview from New York. Standard & Poor’s cut the outlook on its equivalent BBB rating for Brazil to negative on June 6.

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