Brazil's Central Bank Acts to Support Real as Budget Votes Loom

  • Congress is due to vote on changing this year’s fiscal target
  • Volatility highest among major tenders tracked by Bloomberg

Brazil’s central bank stepped up support for the real ahead of votes by lawmakers on whether to overturn spending vetoes and after a Congressional committee passed a bill changing this year’s budget target before interest payments to a deficit from a surplus.

The real advanced 0.2 percent to 3.8139 per dollar Tuesday in Sao Paulo, after declining as much as 0.7 percent. The central bank held two extraordinary auctions for a total of as much as $500 million in foreign-exchange credit lines to boost dollar liquidity, and also conducted its regular daily auctions of foreign-exchange swaps. The real has tumbled 30 percent this year, the most in emerging markets.

"The central bank is now set to defend the real, or at least smooth the selloff by direct interventions," said Ipek Ozkardeskaya, an analyst at London Capital Group in London.

Congress’s budget committee on Tuesday passed a bill changing this year’s fiscal target, a move that government officials have said is necessary as the country’s worst recession in 25 years trims tax revenue. Lawmakers are also scheduled to resume an analysis of presidential vetoes on measures including salary increases for judiciary employees, which if overturned could undermine Finance Minister Joaquim Levy’s plan to cut public spending.

"This is proving to be a very volatile day even with the central bank trying to defend the real," Joao Paulo de Gracia Correa, a foreign-exchange manager at SLW Corretora de Valores, said from Curitiba. "The political turmoil is back to the center of attentions with the congress votes and impeachment speculation."

One-month implied volatility in Brazil’s currency was 21 percent, the highest among 16 major dollar counterparts tracked by Bloomberg.

President Dilma Rousseff is struggling to win support for austerity measures designed to restore the country’s fiscal health, while facing calls for her impeachment related to the way she accounted for government finances in 2014 and 2015.

The head of the lower house of Congress, Eduardo Cunha, told reporters in Brasilia on Monday that he hasn’t decided on whether to go forward with an impeachment petition filed last month by a group of high-profile lawyers including Helio Bicudo, a prominent former member of Rousseff’s Workers’ Party.

Brazil can increase its 2016 revenue by as much as 30 billion reais ($7.9 billion) if it implements more efficient rules to collect late taxes, Luiz Roberto Beggiora, who manages debt collection at the Finance Ministry’s Prosecutors Office, said in an interview in Brasilia. The Finance Ministry is finalizing new rules that will need to be voted on in Congress, he said.

"While the idea is investor-friendly as the consolidation in budget is what is needed in Brazil, collecting higher taxes will certainly see decent resistance in the Congress, at this particular time when Brazil’s economy is struggling," London Capital’s Ozkardeskaya said.

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