Photographer: Dado Galdieri/Bloomberg

Brazil Real Drops as Budget Deficit Concern Outweighs Bank Vow

  • Government commits to paying back money to state-owned banks
  • Nation reported biggest primary budget deficit of 2015

Brazil’s real dropped as concern the government will struggle to curb the budget deficit outweighed a commitment to pay money it owes state-owned banks.

Investors are skeptical that Finance Minister Nelson Barbosa, who took office Dec. 18, will be able to fulfill his pledge to continue his predecessor Joaquim Levy’s belt-tightening. Data released Tuesday showed the country’s primary budget deficit, which excludes interest payments was 21.3 billion reais ($5.5 billion) last month, the worst on record.

"There are still worries about Barbosa’s ability to clean house and improve the country’s fiscal accounts," said Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo. "It’s hard for him to earn the market’s confidence."

The real dropped 0.1 percent to 3.8642 per dollar Tuesday in Sao Paulo, extending its loss this year to 31 percent, the most among major currencies tracked by Bloomberg.

Traders have pushed down the value of Brazil’s currency as President Dilma Rousseff struggles to shore up the budget amid a widening corruption scandal and the threat of further rating downgrades. Congress in December passed legislation that relaxes the government’s primary budget target for this year, allowing it to post a deficit rather than a surplus. Analysts surveyed by the central bank don’t expect the government to close the budget gap until 2017.

The nation’s treasury will pay local public banks a total of 57 billion reais that it owes them, interim Treasury Secretary Otavio Ladeira told reporters in Brasilia on Monday. Scrutiny of government accounting practices increased this year, as critics accused the president of manipulating budget data to hide the severity of fiscal gaps that contributed to two credit-rating downgrades and pushed the sovereign into junk.

"The decision to pay what they owe to public banks can be seen as a positive signal of commitment to the market," said Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores in Curitiba, Brazil.

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s interest rates, rose 0.08 percentage point to 15.85 percent.

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