Brazil's Real Falls Amid Renewed Concern Over Fiscal Deficits

  • Folha report fuels speculation government will abandon target
  • Annual inflation unexpectedly accelerated in January

Brazil’s real slipped, paring its second consecutive weekly advance, on speculation the government will abandon its fiscal target this year and slow the pace of spending cuts.

The real weakened 0.3 percent to 3.9039 per dollar in Sao Paulo, leaving it up 2.4 percent this week. The currency is the best performer in Latin America this year after losing more than a third of its value in 2015 on concern the government will struggle to shore up the nation’s finances. 

Concern was raised again on Friday when newspaper Folha de S. Paulo reported that the Finance Ministry is considering bringing forward a proposal to make fiscal targets more flexible, calling into question this year’s goal for a surplus of 0.5 percent of gross domestic product before interest payments. Brazil had its credit rating cut to junk by Standard & Poor’s and Fitch Ratings last year because of low growth, fiscal concerns and the political outlook as President Dilma Rousseff struggled to fend off impeachment. A surprise acceleration in inflation last month added to pessimism on the economy.

"Fiscal shenanigans combined with rising inflation discouraged any flow into the real," said Ipek Ozkardeskaya, an analyst at London Capital Group.

The government still hasn’t decided how much spending it will cut from this year’s budget, but the amount will be less than in 2015, Planning Minister Valdir Simao told Folha.

Swap rates on contracts due January 2017, a measure of traders’ wagers on the direction of interest rates, rose 0.03 percentage point to 14.56 percent.

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