The Brazilian real leads the tumble in the emerging-market space as speculators feel Brazil is not doing all it can to halt the increasing budget deficit. The demand for the real suffers after the South American currency rallied during the last couple months with the Brazilian government altering swaps. The government also began to increase interest rates in an attempt to battle higher than ideal inflation.
In September through October, the real steadily increased as monetary tightening was being played out by the Brazilian central bank. September’s inflation was lower than in the past at 5.86 percent, higher than the 4.5 percent target.
The Brazilian government announced that the budget deficit increased to 3.3 percent of gross-domestic product during the same time, the largest in four years. It is expected that the Brazilian government will eliminate tax credits on consumer goods to free up public finances.
The real fell over one percent today, adding to a 3.6 percent weekly decline. Local debt saw increasing yields, up 12 bps, as demand fell. Yields increased to 12.46 percent, the highest rate since the bond’s auction in March 2012. Even more troubling, the yields on the 2023 maturing debt increased 58 bps within the last seven days.
The Standard and Poor’s credit agency, along with Moody’s Analytics, is likely to lower the credit rating for Brazil if fiscal deterioration continues. “The fiscal problem is generating a lot of doubts,” said Alfredo Barbutti, an economist at BGC Liquidez DTVM. Both credit agencies rate Brazil’s credit worthiness two levels above junk.