- Plan to cut government spending falls flat with investors
- Currency is down 19% this year, the worst among majors
The Brazilian real dropped to a record low and stocks slumped the most since early 2023 as a proposal to cut some $12 billion in public spending disappointed investors who have grown increasingly concerned about the country’s budget deficit.
The currency fell as much as 1.5% on Thursday to 6.02 per dollar. Swap rates surged more than 40 points, and the country’s benchmark stock index dropped 2.4%.
Finance Minister Fernando Haddad unveiled a long-awaited plan to cut 70 billion reais from public spending through 2026. The measures include limits to minimum salary growth, capping high salaries for public workers and higher taxes for income above 50,000 reais monthly.
“We see more uncertainty and a greater risk perception across Brazilian assets,” said Patricia Urbano, a fund manager with Edmond de Rothschild. “Local assets have been selling off over the past two days, and could fall further given the level of uncertainty.”
The real extended its drop near the end of the session after President Luiz Inacio Lula da Silva doubled down on the fiscal plan. Even as Haddad said his team would present additional measures to curb spending if necessary in the future, Lula said he wanted his cabinet to focus on finishing those it had already put forth instead of developing new proposals.
Brazilian assets have been battered by growing pessimism on the outlook for the country’s growing budget deficit. Lula has increased spending since taking office in 2023 to fulfill pledges of improving living standards for poor Brazilians. Public coffers have come under additional pressure this year as the administration responds to disasters including historic floods, widespread forest fires and a record drought.
The plan, which was expected to be announced earlier this month, was delayed as Lula pushed to include a measure exempting wages of up to 5,000 reais monthly from income tax. The move fueled pessimism as traders bet it would water down the fiscal impact of the package.
“The government proposed the bare minimum to keep the fiscal framework alive, but this was not enough to reverse the perception that the country’s fiscal situation is worsening,” said Luis Cezario, chief economist at Asset1 Investimentos. “The fiscal package seemed too little to late.”
The growing distrust of the government’s fiscal commitment has hit inflation expectations, pushing the central bank to hike interest rates just as the Federal Reserve eases monetary policy.
Market pricing shows traders are betting the Selic benchmark rate will be close to 15% by the end of next year, from a current 11.25%. JPMorgan is now projecting that it will hit 14.25% by the end of the tightening cycle, up from a previous forecast of 13%.
“The risk of greater fiscal slippage than we anticipate for 2026 and beyond could further stimulate demand in an already overheated economy,” Cassiana Fernandez, the head of Latin America economic research at JPMorgan wrote in note. “Monetary policy will need to act more decisively to counteract these fiscal effects and their unbalanced risks.
The slide in Brazil markets also comes amid a broad selloff in emerging currencies following Donald Trump’s election in the US. Developing assets have been hit hard by prospects Trump’s policies will strengthen the dollar and fan inflation in the world’s largest economy, forcing central banks around the globe to keep rates higher and crimping economic growth.
But the losses stand out even amid the gloom for EM assets. Brazil’s currency is down more than 19% this year, leading losses among majors. The Ibovespa stock index has lost more than 7% this year, lagging EM stocks and most global benchmarks.
JPMorgan and Morgan Stanley both downgraded Brazilian equities in the past few weeks, citing a growing budget deficit and the prospect of higher rates.
“The government spent the last month creating expectations that it would present a spending cut package, but the big day arrived and we see fiscal stimulus,” said Pedro Dreux, a money manager at Occam Brasil Gestao in Rio de Janeiro. “The result is a deterioration of assets, reflecting the preferences of an administration that prefers to overspend.”
Written by: Giovanna Bellotti Azevedo and Leda Alvim — With assistance from Barbara Nascimento and Daniel Carvalho @Bloomberg
The post “Brazil’s Real Hits All-Time Low as Spending Cuts Disappoint” first appeared on Bloomberg