As if things were not difficult enough for markets in Brazil, whose stocks and c...
BRASILIA - As if things were not difficult enough for markets in Brazil, whose stocks and currency are among the world’s worst-performing this year, an unexpected twist in the country’s fragile politics threatens to make the situation even tougher.
Brazil’s government is in its seventh consecutive year of budget deficit, which is pegged at 124 billion reais this year. If the 20 billion-reais additional spending cannot be clawed back from elsewhere, the budget will be blown. “The economy and markets will suffer from a lack of confidence in the government, and the president’s capacity to deliver at a time of crisis,” said Creomar de Souza, founder of Brasilia-based consultancy Dharma Political Risk and Strategy.Analysts at Morgan Stanley said the vote marked a major turning point and recommended clients reduce their exposure to Brazilian credit and the currency.
Only a week ago, when the real was trading around 4.60 per dollar, Economy Minister Paulo Guedes said the real could sink as low as 5.00 per dollar “if we really mess up.”Guedes and his team argue that shrinking the budget deficit, national debt and public sector would lay the foundation for lower borrowing costs and a surge in private-sector investment, confidence, spending and ultimately economic growth.
“We don’t have the resources for new mandatory expenditures of 20 billion reais per year,” he told Reuters. “To do this we would need to cut a corresponding amount of public investment, which is the only discretionary expense that could quickly be reduced that much.”
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