Brazil's Financial Struggles

By Rodrigo Campos

NEW YORK/LONDON (Reuters) – Brazil's real fell dramatically, hitting a record low as market concerns rise over government spending plans and a widening budget deficit.

The local currency reached an unprecedented low of 6.3139 to the dollar, closing down 2.9% at 6.2896. This marks its largest daily decline since November 2022. Earlier, it closed at 6.26, down 2.7%.

The decline was exacerbated when the U.S. Federal Reserve cut interest rates and indicated a slower approach in lowering borrowing costs, strengthening the dollar globally.

The Bovespa stock index, a benchmark for Brazilian stocks, dropped 3.15%, marking a six-month low.

Investors are worried as the cost of insuring against the country’s bond debt hit a 14-month high amid a financial crisis.

Concerns arise about lawmakers' ability to pass a key fiscal bill aimed at stabilizing government finances. Thomas Haugaard, a portfolio manager, noted the fragile fiscal situation and rising inflation expectations.

Despite Congress approving the main text of a bill, there are still amendments pending. Finance Minister Fernando Haddad expressed confidence in the Senate's readiness to vote. He emphasized the necessity of measures to enhance fiscal stability.

Brazil’s central bank has maintained a tough stance with consecutive spot U.S. dollar auctions. Analysts highlighted the central bank's proactive measures but emphasized the need for fiscal tightening beyond mere growth expectations.

Current yields on local sovereign bonds are high, closing at 14.77%. Credit default swaps reached their highest point since October 2023, reflecting increased risk perceptions. The MSCI Brazil index has dropped over 30% this year, and the nominal budget deficit now stands at 9.5% of GDP, significantly up from 4.6% since President Luiz Inacio Lula da Silva's inauguration in January 2023.