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Brazil's currency tumbled on Thursday, after government promises to cut costs by 70 billion reais (US$12 billion) over the next two years failed to calm investors' nerves over Latin America's largest economy's finances. It fell to its lowest price.
The real fell as much as 1% against the US dollar until reaching the psychological benchmark of $6, then offset its losses and ended the day trading 0.8% lower.
Government borrowing costs have also risen to record highs as markets question the effectiveness of spending controls to balance the budget.
The long-awaited measures announced late Wednesday are the latest in fiscal policy under President Luiz Inacio Lula da Silva, who has pledged extra cash for welfare and infrastructure to improve living standards in the 213 million-nation country. This comes in response to growing concerns about the
The South American country's business leaders have warned that rising state spending risks fueling inflation and pushing debt to unsustainable levels.
“Even if we are positively surprised by the details, attention will quickly turn to the challenge of approving all the measures in time for them to come into force early next year,” said Victor Szabo, emerging market fixed income portfolio manager at Abdon. said. “The Brazilian market will never be satisfied with anything the Lula government does.”
This savings activity aims to ensure that Brasilia achieves its goal of eliminating its primary budget deficit before interest payments in 2025.
Finance Minister Fernando Haddad said Thursday the government would meet its targets next year, adding that investors had been too pessimistic. “[These measures] It will strengthen the government's commitment to the country's fiscal sustainability.”
“The market needs to reassess what the government is doing. The market made mistakes on both growth and deficits. [forecasts]” he added.
Marcelo Mesquita, founding partner of asset management firm Revlon Equities, said of fiscal policy: “The direction is right, but the doses are not high enough. Governments need to cut costs and taxes, as Argentina has shown can have extraordinary results.”
Brazil's GDP is expected to expand by 3.2% in 2024 and unemployment is near its lowest since records began, but some fear the economy is overheating.
The country's central bank has emphasized the need for fiscal discipline and recently began raising benchmark interest rates to rein in consumer price inflation, which has exceeded the official ceiling of 4.5%.
Concerns over rising prices pushed the yield on the benchmark 10-year Treasury note to a record high of 13.13% on Wednesday.
In parallel, the real depreciated by 23% against the dollar, making it the worst-performing major emerging market currency in 2024. On Thursday, Sao Paulo's Bovespa stock index fell 1.3%.
Tiago Negreira, an economist at asset management firm Tenax Capital, described the policy as “disappointing” and said the changes were mostly budget reallocations, with cuts of only about 30 billion reais. Ta.
“Today's announcement weakens Mr. Adad and shows how reluctant the government is to move forward with fiscal adjustment,” he added.
The move was accompanied by an unexpected income tax reform from 2026 that would benefit the lower middle class, aimed at softening public backlash against spending cuts.
In line with Lula's campaign promise, the payroll tax exemption will be increased for salaries up to R$5,000 per month, at a cost of R$35 billion. Haddad said the cost would be covered by increased income taxes on the wealthy.
Analysts said overall spending is likely to continue to rise, although some proposals still require parliamentary approval, as the government's own public accounting rules require annual increases in the budget. did.
Jason Tubey, deputy chief emerging markets economist at Capital Economics, said the measures “failed to meet expectations.”
“[They] Reinforcing the idea that political commitment to stabilizing finances is lacking. “One consequence of that is that central bank tightening cycles could become more aggressive,” he said.
Brazil's nominal budget deficit has nearly doubled since Lula took office early last year, to 9.3% of GDP in the 12 months to the end of September, central bank data shows.
Additional reporting by Beatriz Langella
