Tags: Brazil | real | deficit | currency

Brazilian Real Extends Fourth Monthly Decline as Deficit Widens

Friday, 31 Jan 2014 11:01 AM

Brazil’s real extended its fourth straight monthly drop as the government’s budget deficit widened last month to almost the widest since 2009.

The currency depreciated 0.8 percent to 2.4286 per U.S. dollar at 12:35 p.m. in Sao Paulo, falling along with most emerging-market currencies and extending its drop this month to 2.7 percent. Swap rates on contracts maturing in January 2015 rose 13 basis points, or 0.13 percentage point, to 11.76 percent. They are up 118 basis points in January, the most since the global financial crisis in 2008.

The real declined as the government’s budget deficit widened in December to 3.3 percent of gross domestic product, compared with 3.4 percent in October, the widest in four years, the central bank reported. The primary surplus, which excludes interest payments, was 1.9 percent of GDP, missing the government’s 2.3 percent target, which had been reduced from about 3.1 percent at the start of last year.

“As emerging markets suffer from strong turbulence, it would be prudent for Brazil to signal a more austere primary surplus target for 2014,” Rafael Bistafa, an economist at Rosenberg Associados in Sao Paulo, said in a phone interview.

Swap rates climbed as a falling real added to speculation that the central bank will further raise borrowing costs to curb inflation after increases in other developing nations.

The real has fallen 7.6 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will erode demand for emerging-market assets.

Currency Concern

“There is a concern over the falling exchange rate as central banks in emerging markets are on a path of tightening,” Flavio Serrano, an economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a phone interview. “The exchange rate is at a level that could affect inflation.”

The central bank sold $198 million of foreign-exchange swaps today under daily auctions announced Dec. 18 to bolster the currency and limit import price increases and also offered $2.3 billion of credit lines today. Brazil extended the maturity on the $11 billion of swap contracts maturing Feb. 3 after transactions this month.

A Bloomberg index of the 20 most-traded emerging-market currencies tumbled 2.9 percent in 2014, extending its decline over the past year to 10 percent, bigger than any annual slide since 2008.

India, South Africa and Turkey raised borrowing costs this week as the Fed pressed on with a reduction in a stimulus program that has supported developing-market assets.

Central bank president Alexandre Tombini said this week that Brazil is combating inflation in the context of a weaker real. Policymakers raised the target lending rate by 50 basis points on Jan. 15 for a sixth consecutive time, increasing it to 10.5 percent.

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Brazil's real extended its fourth straight monthly drop as the government's budget deficit widened last month to almost the widest since 2009.
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2014-01-31
Friday, 31 Jan 2014 11:01 AM
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