The Brazilian real fell to a historic nominal low against the foreign currency this week and broke the level of 6 for each dollar (more than 4% in the last four days).
The strong depreciation of the real in recent days, after the negative impact that the tax plan presented by the Minister of Economy of Brazil, Fernando Haddad, and contrary to the appreciation of the Argentine pesohe adds extra pressure to the relationship with Brazil, our main commercial partner. This situation would generate an increase in the cost of exports of tradable goods and a reduction in the cost of imports from the neighboring countrya fact that, if extended, could have a impact on fiscal accounts.
Only with Thursday’s numbers, The real lost more than 1.5% against the dollar and has accumulated a fall of more than 3.4% so far in November. Meanwhile, the Bovespa It fell 2.4% the previous day, then fell 1.7% on Wednesday. In the monthly accumulated it is 2.7% down (without taking into account Friday’s data). In turn, The Brazil ETF fell 3.6% on Wednesday and this day it falls another 3.7%, so it has accumulated a decline of 7.1% in the last 5 days.
This is a result of the Lula Da Silva administration announcing a fiscal plan that did not meet market expectations. Specifically, Haddad assured that they will seek cut public spending by more than 70,000 million reais (US$11.8 billion) over the next two years, but these developments were complemented with creating greater tax exemptionsparticularly on the income tax and aimed at easing the burden on the middle class.
“The above affected the credibility of the announcement, since to meet fiscal objectives, analysts point out that very optimistic macro projections should be verified. The fiscal concern is not new and has already been affecting the performance of Brazilian assets and the real itself, leading the Central Bank to demand structural measures to control spending and accelerate the pace of adjustment of its interest rate. In particular, in November the BCB increased the SELIC rate by 50 basis points, leaving it at 11.25% annually,” they specified from Outlier.
All in all, what puts Brazil in the eye of the storm is that its domestic debt in reais amounts to 65% of GDP. In turn, they warned from PPI that “The rise in rates increases the debt burden, widens the deficit and feeds a vicious circle that cannot be resolved with monetary policy alone”. Therefore, they may need stronger fiscal measures. “The market expected deeper spending cuts rather than new taxes, considering that Brazil already faces one of the highest fiscal pressures in the region”they expanded.
Trade balance with Brazil: the fears behind it
The rise in the exchange rate in Brazil in the last two days translated into a drop in the real bilateral exchange rate of 2.84%, to the lowest since December 2015 and this, in turn, caused a ITCRM drop of -0.67%warned the reports circulating around the city. Argentina, with strong exchange restrictions, a crawling peg at 2% and still inflationary inertia above that level, generates an appreciation of the peso against Latin American currencies that devalued after Donald Trump came to power in the US and its correlation with the strength of the dollar index.
“The appreciation of the weight could worsen our current account deficitas the tradable goods and services of the neighboring country become relatively cheaper in relation to their own. A larger current account deficit increases the required financial account surplus given the exchange rate scheme proposed by the government. It is still early to give rulings on the impact of these movements on the external sector, but it should be a relevant element to go monitoring when thinking about the sustainability of the exchange rate scheme”they warned from PPI.
For its part, since Wise Capitalcontributed: “The fact that Brazil is Argentina’s main trading partner is not a minor fact. A scenario of devaluation and rising inflation will impact the increase in the price of the products that our country imports from the South American giant”.
For Outliermeanwhile, We will have to see how the situation in Brazil continues to evolve, beyond the exchange rate. “From the point of view of the real economy, Brazil continues to be our main trading partner, so if the ongoing crisis affects the performance of its level of activity, it is difficult to think that it will not affect us,” they closed.
Source: Ambito
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