The Brazilian real fell to a record low as the government’s proposed measures to cut nearly $12 billion in spending disappointed investors, who are increasingly concerned about the country’s budget deficit.
The currency fell 1.2%, to 6 reais per US$1, weakening below the previous intraday low of 5.97 per US$1 recorded in May 2020 during the Covid-19 pandemic.Swap rates rose more than 40 basis points and the country’s benchmark stock index fell to the lowest level since August.
The measures detailed by Finance Minister Fernando Haddad on Thursday include limits on minimum wage growth, caps on high wages for public employees and higher taxes for incomes over 50,000 reais per month (US$8,346).
Brazilian assets have been hit by growing pessimism about the prospects for the country’s larger budget deficit. President Luiz Inácio Lula da Silva has increased spending since taking office in 2023 to fulfill his promises to improve the living standards of poor Brazilians.
Public coffers have come under additional pressure this year as the administration responds to disasters including historic floods, widespread wildfires and record drought.
tax package
The long-awaited plan, which aims to cut 70 billion reais (US$11.8 billion) from public spending until 2026. The measure, at Lula’s request, fueled pessimism, as operators bet that it would dilute the fiscal impact of the package.
“Fiscal fears will continue to weigh on assets in the short term. Haddad was trying to calm markets, emphasizing several times that the government intends to stabilize the fiscal framework. But the market perceives that the package is too small, too late,” said Bernd Berg, senior analyst at InTouch Capital.
Growing distrust in the government’s fiscal commitment has affected inflation expectations, pushing the central bank to raise interest rates just when the Federal Reserve eases monetary policy.
The fall in Brazilian markets also occurs amid a widespread sell-off in emerging currencies following the election of Donald Trump in the United States.
The Brazilian currency has fallen almost 19% this year, leading losses among major currencies. JPMorgan and Morgan Stanley downgraded Brazilian stocks in recent weeks, citing a growing budget deficit and the prospect of higher rates.
