Brazil Swap Rates Drop as GDP Growth Outlook Pared; Real Gains

Brazil’s swap rates fell after economists cut growth estimates, fueling wagers the central bank will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2023 declined seven basis points, or 0.07 percentage point, to 12.86 percent in Sao Paulo today. The real appreciated 0.2 percent to 2.3413 per dollar, the strongest since Dec. 27.

Economists lowered growth forecast for this year to 1.67 percent from a 1.79 percent projection a week ago, according to the median of about 100 estimates in a central bank survey published today. Policy makers have raised the target lending rate by 3.25 percentage points since April to curb inflation.

“The central bank survey showed a new and significant deceleration in growth expectations,” Paulo Nepomuceno, a fixed-income strategist at Coinvalores CCVM in Sao Paulo, said in a telephone interview.

The real posted on Feb. 21 the biggest weekly gain in emerging markets, rising 1.8 percent as Brazil reported higher-than-forecast foreign investment a day after the government pledged to reduce spending.

Finance Minister Guido Mantega said Feb. 20 that Brazil is cutting 44 billion reais from this year’s budget, allowing the government to meet a primary surplus target, excluding interest payments, of 1.9 percent of gross domestic product.

Swap rates fell last week partly on speculation that improved fiscal management will help slow inflation and allow the central bank to limit further increases in borrowing costs. The government’s goal is to consolidate public accounts and curb price increases, Mantega said last week.

Declining Real

The currency has dropped 2.6 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating and amid speculation that a reduction in stimulus by the U.S. Federal Reserve along with turmoil in other developing nations will sink demand for emerging-market assets.

A weaker real helps to narrow Brazil’s current-account deficit, central bank President Alexandre Tombini said after a Group of 20 meeting in Sydney yesterday.

The gap in the current account, the broadest measure of trade in goods and services, expanded to 3.67 percent of GDP in January. It reached an 11-year high of 3.68 percent in October.

There are expectations capital flows will keep improving as problems in countries such as Venezuela and Ukraine highlight Brazil’s advantages, according to Deives Ribeiro, foreign-exchange manager at Fair Corretora in Sao Paulo.

‘Bad Abroad’

“We still see pessimism on the economy, but the situation is also bad abroad,” Ribeiro said in a phone interview. “Brazil is the least ugly of the ugly ducklings.”

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 $517.1 million.

Brazil spent 2.4 billion reais in 2013 under the program of currency swap auctions, Eduardo de Lima Rocha, the central bank’s chief of the department of accounting and financial execution, told reporters in Brasilia on Feb. 20.

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