- Brazilian assets tumbled on Thursday as prospects the government will bypass fiscal rules and signs of further spending ahead of next year s election boosted concern over the nation s fiscal trajectory.
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Stocks fell as much as 4.6% and interest-rate swaps contracts surged as traders weighed President Jair Bolsonaro s pledge to offer aid to truckers and news his administration will seek to change how the spending cap, a rule that limits the growth of public expenses, is calculated.
The government decided to review the rule to find budget space for a new social program that Bolsonaro has been pushing for as he seeks to boost his record-low popularity before the 2022 elections. The plan is to use the previous year inflation to adjust public spending limits, instead of inflation of a 12 month period ended in June, as the rule is currently set up.
The change, added to a constitutional amendment currently being debated in the lower house, will free up about 40 billion reais $7 billion in the budget, according to people familiar with the matter. The government hopes the bill will be voted on today by a commission and be taken to the house floor soon after, the people said, asking not to be identified because discussions are private.
The bill also creates a yearly limit for court-ordered payments, which frees up around another 40 billion reais, bringing the total budget room to about 80 billion reais.
The president, who saw his popularity slide amid soaring food and fuel inflation, said on Thursday that the government will give a payment to truck drivers to offset the impact of higher diesel prices. Bolsonaro, who is up for re-election in 2022, gave no details on how he will fund the aid, which should help about 750,000 self-employed truckers. O Globo newspaper reported that the monthly stipend is expected to be at 400 reais and should be valid until December of next year.
The Ibovespa stock index was down 3.2% as of 4: 15 p.m. in Sao Paulo, leading losses among over 90 primary global indexes tracked by Bloomberg. The Brazilian real weakened 1.3%, while swap rate contracts due in January 2023 surged almost 70 basis points.
Amid the deterioration of markets, traders have boosted bets the central bank will hike the benchmark rate by 125 or even 150 basis points when they meet next week, according to data from local exchange B 3. Policy makers have pledged to increase the Selic by 100 basis points.
Undermining the spending cap will keep downward pressure on asset prices until the government moves to reassure investors about its fiscal health, Carlos Woelz, a founding partner of hedge fund manager Kapitalo Investimentos, said at an event.
It looks like magic: You spend more, no expenses are cut. Woelz said no one pays the bill. How do Elon Musk, Gwyneth Paltrow and Donald Trump short-circuit your ability to think rationally?
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