Brazilian Real Gains Most Among Major Currencies on Budget Cut

Brazil’s real rose the most among major currencies as the government reduced spending to meet a budget target, easing concern that fiscal deterioration will lead to a lowered credit rating.

The real appreciated 1 percent to 2.3704 per U.S. dollar at the close in Sao Paulo, the strongest level since Jan. 21. Swap rates on contracts maturing in January 2016 dropped 17 basis points, or 0.17 percentage point, to 11.82 percent on speculation improved management of finances by the government will help slow inflation and allow the central bank to limit further increases in borrowing costs.

The government said in a statement that it will cut 44 billion reais from this year’s budget, allowing Brazil to meet a primary surplus target, excluding interest payments, of

1.9 percent of gross domestic product. Finance Minister Guido Mantega told reporters in Brasilia that the government’s goal is to consolidate public accounts and curb inflation.

“The fiscal target is strong,” Reginaldo Galhardo, foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo, said in a phone interview. “The market has seen the number as convincing.”

The budget is based on estimates that Latin America’s largest economy will expand 2.5 percent this year and the annual inflation rate will slow to 5.3 percent.

Fitch Ratings said in an e-mailed statement that the budget cut is a step in the right direction and that the budget target is based on a “more realistic” economic growth forecast, although “slightly optimistic.”

Rating Outlooks

Standard & Poor’s assigned a negative outlook to the nation’s credit rating in June, and Moody’s Investors Service lowered its outlook to stable from positive in October. Brazil is rated two levels above junk at BBB by S&P and Fitch and an equivalent Baa2 by Moody’s.

Increased spending has caused Brazil’s government budget deficit to widen and inflation to stay above target even as the economy showed signs of weakness.

The budget deficit grew in December to 3.3 percent of GDP, compared with 3.4 percent in October, the widest in four years. While the annual rate of consumer price increases dropped to a one-year low of 5.59 percent in January, it has remained above the 4.5 percent target since August 2010.

Brazil lifted the target lending rate on Jan. 15 by 50 basis points for a sixth consecutive meeting to curb inflation, increasing it to 10.50 percent, and has raised borrowing costs by 325 basis points since April.

“The fiscal policy we’re carrying out helps monetary policy be less severe,” Mantega said.

‘Creative Accounting’

Last year, the government shaved 28 billion reais from the budget, as well as 10 billion reais to cover states and cities, while posting a primary surplus of 1.9 percent of GDP. That was less than its 2.3 percent target, which had been reduced from about 3.1 percent at the start of last year.

“We’ll see if the government achieves the target with real cuts, without creative accounting and extraordinary revenue,” Tony Volpon, the head of research for the Americas at Nomura Holdings Inc., said by phone from New York.

Swap rates climbed earlier today as the national statistics agency reported that the unemployment rate increased less than forecast to 4.8 percent, a level lower than all of the forecasts of economists surveyed by Bloomberg.

To support the real and limit import price increases, Brazil sold $197.6 million of foreign-exchange swaps today under a program announced in December. The central bank also held an auction to extend maturities on swaps due in March, rolling over $516.7 million.

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