SAO PAULO: Brazilian assets finished last year lagging all major peers, with the real posting its biggest slump since the pandemic shock of 2020 amid mounting scepticism over President Luiz Inacio Lula da Silva’s commitment to fix a ballooning budget deficit.
The real weakened 21% against the US dollar last year, the worst among 31 major currencies alongside Argentina’s tightly controlled peso. Losses accelerated in November after a long-awaited financial package underwhelmed investors.
Not even a historic intervention by the central bank – spending some US$20bil in reserves in two weeks – was able to reverse the rout.
The monetary authority stepped in again on Monday, the last trading session of the year for local assets, selling about US$1.8bil in the spot market.
The currency reversed earlier losses and ended the day 0.2% higher in a low liquidity day.
Despite the bounce backs when the central bank steps in, the currency sell-off has disseminated into other assets.
Spreads on five-year credit default swaps widened more than any developing-world peer, and yields on local government bonds soared to the highest since former President Dilma Rousseff was ousted in 2016.
With the central bank forced to hike interest rates to try and contain the damage to inflation expectations, an equity rout erased more than US$290bil in market value and meant the Ibovespa lagged all primary equity indexes, except Latvia’s and Mexico’s in US dollars terms.
Price action “is telling us that Brazil’s leadership probably needs to deal with the market’s financial concerns sooner rather than later,” said Simon Quijano-Evans, chief strategist at Gramercy Ltd in London.
Lula is running a budget deficit that’s expanded to the equivalent of about 10% of Brazil’s gross domestic product.
His economic team unveiled last month a batch of financial measures, but also tacked on tax exemptions – casting doubt on the government’s willingness to rein in public expenditure.
The ballooning deficit, a topic that has fuelled investor angst from France to Colombia, also comes at a difficult time for emerging markets.
Developing nations are going into 2025 grappling with China’s economic woes, lingering geopolitical tensions and uncertainty over the impact of US President elect Donald Trump’s policies on the US dollar and the path for global interest rates.
While the central bank’s intervention might provide some temporary relief to the real, analysts are still struggling to find a floor for the currency after it weakened to fresh all-time lows.
Local wealth manager Oriz Partners sees “little room” for it to appreciate, and Wells Fargo said it could reach seven per US dollar by the first quarter of 2026 – a 13% drop from current levels.
“Brazil’s high rates and relatively cheap valuations could provide some support, but it’s difficult to reverse the course in the absence of greater market confidence for financial sustainability,” said Dan Pan, an economist at Standard Chartered Bank. — Bloomberg
