Brazil Real Drops Amid Speculation Budget Gap to Rise to Record

  • Budget deficit could be up to 50 billion reais, O Globo says
  • Real is the worst performer among major currencies this year

Brazil’s real declined amid renewed concern that the nation’s fiscal picture is worsening as the economy sinks into a recession.

Brazil’s government, which previously targeted a so-called primary surplus, may announce by Tuesday a budget deficit excluding interest payments of as much as 50 billion reais ($13 billion) this year, O Globo newspaper reported, without saying where it got the information. That would be the widest on record. The pessimism overwhelmed optimism on global growth generated by China’s move to cut interest rates and signals from the European Central Bank that it could act to stoke the economy.

The currency dropped 0.8 percent to 3.9072 per dollar Monday in Sao Paulo after gaining as much as 1.3 percent. It has weakened 32 percent this year, the most among major currencies.

"A longer than previously expected gloomy political environment and insufficient fiscal adjustment will likely sustain high risk premiums and poor confidence for longer," said Mauricio Molan, chief economist at Santander Brasil SA in Sao Paulo. The real is likely to weaken past 4 per U.S. dollar in coming months, Molan wrote today in a note to clients.

Brazilian policy makers held the Selic rate at 14.25 percent for a second straight meeting on Oct. 21 and said they would bring inflation to target within the monetary-policy horizon, rather than in 2016 as they had said in previous statements. Swap rates on the contract maturing in January 2017, a gauge of expectations on Brazil’s interest-rate moves, declined 0.03 percentage point to 15.32 percent.

President Dilma Rousseff is struggling to win support for austerity measures she says are needed to restore fiscal health amid calls for her impeachment on allegations she wrongly accounted for government finances in 2014 and 2015. 

Analysts surveyed by Brazil’s central bank predict consumer prices will increase 9.85 percent in 2015, even as gross domestic product shrinks by 3.02 percent. The analysts see a second year of recession in 2016, with GDP dropping by 1.43 percent.

The real advanced earlier Monday as analysts predict further easing from the ECB after President Mario Draghi said the bank was weighing the need for more stimulus. China lowered its benchmark interest rates last week, and 14 of 37 economists in a Bloomberg survey say the Bank of Japan will add to easing when policy makers meet Friday. The U.S. Federal Reserve will gather Wednesday and the central banks of Sweden and New Zealand will also set rates this week.

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