(Bloomberg) -- Brazil’s real strengthened after Finance Minister Fernando Haddad reiterated the government’s commitment to fiscal responsibility amid market concerns about heightened public spending.
During a Group of 20 nations press conference in Washington, Haddad said that Brazil needed to reinforce the credibility of rules approved last year to ensure the sustainability of the country’s debt.
“It is not a matter of reformulating, just reassuring investors that these parameters are credible to the middle and long term,” Haddad said about the so-called fiscal framework.
Speaking alongside him, central bank chief Roberto Campos Neto said that he expected President Luiz Inacio Lula da Silva’s government to soon announce measures to shore up Brazil’s finances, and that markets are currently exaggerating the fiscal risks.
The real erased earlier losses to rise as much as 0.5% in the wake of the comments. Medium and long-dated swap rates fell nearly 30 basis points to reach session lows as traders boosted their expectations about a package of spending cuts Haddad has promised to unveil as he seeks to rein in the fiscal deficit. The benchmark Ibovespa stock index also rose.
Haddad said earlier Thursday that the Finance Ministry is “working on” structural spending issues that go beyond the budget freezes it has already put in place. Campos Neto’s remarks, meanwhile, largely echoed those he made at an event in Washington on Wednesday.
“At times, the market sees that it has tightened its grip too much and any news makes it adjust,” said Daniel Leal, a senior fixed income strategist for BGC Liquidez. “It was nothing that hadn’t already been said by both of them, but it’s as if everyone has woken up to these themes now.”
Investors are closely monitoring Brazil’s fiscal situation, with fears about mounting budget deficits and skepticism of Lula’s willingness to entertain spending reductions weighing on local assets. The real is down more than 14% this year, one of the worst performances among major currencies.
Central bankers, meanwhile, have expressed increased concerns about inflation estimates that have risen well above their 3% target even after they hiked Brazil’s benchmark interest rate to 10.75% in September.
“The remarks remove some of the fiscal risk that was being incorporated into the currency price throughout the year,” said Luciano Sobral, chief economist at Neo Investimentos. “Interest rates are already quite high — if there is an improvement in the perception of risk, it should lead to more dollar flows here.”
Still, traders are awaiting concrete actions — including the package of spending cuts — from the government, said Andrea Damico, the chief executive officer of Buysidebrazil.
“We are at a moment where the market is really demanding actions on the fiscal side,” she said. “So this package of spending cuts that will be announced will still be the main event for domestic markets.”
--With assistance from Franco Dantas, Maria Eloisa Capurro, Viktoria Dendrinou, Barbara Nascimento and Felipe Saturnino.
(Updates market move and adds analyst comments and context from fourth paragraph.)
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