Brazil's Real Posts Worst Week in Two Months on Fiscal Concern

  • Government likely to freeze half of previously expected cut
  • Country effectively giving up on primary surplus target: Valor

Brazil’s real posted its biggest weekly loss since mid-December on speculation the government will abandon its fiscal target this year and slow the pace of spending cuts, undermining pledges to shore up the deficit.

The real weakened 2.4 percent this week, to 4.0030 per dollar Friday. It earlier rose 0.2 percent, as a global rally in commodity prices improved the outlook for Brazil’s raw-material exports.

Currency traders are growing increasingly concerned about Brazil’s fiscal accounts after the inability to shore up the budget cost the country its investment-grade credit rating last year. A government official said Brazil is likely to freeze about 25 billion reais in spending, just half of what policy makers had previously considered, as President Dilma Rousseff’s administration struggles to meet its budget target this year. The official announcement won’t come until March, the person said, disappointing investors who had expected the government to release the plan Friday.

"The postponement of the budget announcement jeopardizes the fiscal balance," said Italo Abucater, the head of currency trading at ICAP Brasil Ctvm in Sao Paulo.

The government is effectively giving up on its primary surplus target, newspaper Valor Economico reported. Meeting this year’s goal for a surplus of 0.5 percent of gross domestic product before interest payments would require cutting between 50 billion reais and 60 billion reais from the budget, according to a separate report in O Globo.

The currency has fallen 29 percent in the past year as Brazil’s economy heads for its worst recession in more than a century. A surprise acceleration in inflation last month added to pessimism on the economy. Still, the real has outperformed other emerging-market currencies this year, including Mexico’s peso.

"The analysis that the real depreciated too much last year and has some recovery in store does not make sense," Abucater said. "There is a lack of government planning, so we have space for the currency to depreciate further and it will."

Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, declined 0.055 percentage point to 14.42 percent. They fell 0.14 percent point over the past five days.

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