(Bloomberg) -- The Brazilian real dropped to a record low as the government’s proposed measures to cut $12 billion in spending underwhelmed investors who have grown increasingly concerned about the country’s budget deficit.
The currency fell as much as 1.1% at the open on Thursday to 6 per dollar, weakening past the previous intraday low of 5.97 per dollar seen in May 2020 during the Covid pandemic. Swap rates surged more than 20 basis points, and the country’s benchmark stock index dropped to the lowest since August.
The measures detailed by Finance Minister Fernando Haddad Thursday include limits to minimum salary growth, capping high salaries for public workers and higher taxes for income above 50,000 reais monthly.
“The package is in the right direction, but it has a very limited impact,” said Cristiano Oliveira, chief economist at Banco Pine. “It is insufficient to address the fiscal issues relevant to the market.”
Brazilian assets have been battered by growing pessimism on the outlook for the country’s growing budget deficit. President Luiz Inacio Lula da Silva 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.
Fiscal package
The long-awaited plan, which aims to cut 70 billion reais ($11.8 billion) from public spending through 2026, also includes exempting wages of up to 5,000 reais monthly from income tax. The move, a request from Lula, fueled pessimism as traders bet it would water down the fiscal impact of the package.
“Fiscal fears will continue to weigh negatively on local assets in the short-term,” said Bernd Berg, a senior analyst at InTouch Capital. “Haddad was trying to calm markets, stressing several times that the government intends to stabilize the fiscal framework. But the market perceives the fiscal package is too little and too 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 at 14.5% by the end of next year, from a current 11.25%.
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 almost 19% this year, leading losses among majors. The Ibovespa stock index is down more than 5% 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.
“If there was a real political commitment to stabilizing public finances, we’d have needed to see much more today — more evidence of willingness to cut social welfare/indexation or a clearer idea that Lula is worried about the fiscal position,” said William Jackson, chief economist for emerging markets at Capital Economics. “We didn’t get that.”
--With assistance from Barbara Nascimento.
(Updates with pricing, analyst comments starting in second paragraph)
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