Brazil’s Real Leads Gains as Rousseff Affirms Fiscal Commitment

Brazil’s Real Leads Gains as Rousseff Affirms Fiscal Commitment

By Paula Sambo

9:08 AM BRT
April 1, 2015

(Bloomberg) — Brazil’s real led global currency gains after President Dilma Rousseff affirmed a commitment to do what it takes to meet fiscal targets, fueling speculation that the nation will be able to avoid a junk credit rating.

The real climbed for a third straight day, rising 1.5 percent to 3.1486 per dollar at 11:55 a.m. in Sao Paulo, the best performance among 31 major tenders.

The currency advanced as Rousseff said in an interview Tuesday at the presidential palace in Brasilia that narrowing the budget gap will help boost confidence in the economy. Record budget deficits, stalled growth and allegations of corruption at the state-controlled oil company pushed the real down 17 percent in the first quarter, the biggest drop since 2008.

“All eyes are on the fiscal situation, and Rousseff’s comments were very positive,” Joao Paulo de Gracia Correa, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview. “It is important to know that Brazil will do what it takes to keep the investment grade and that the president is backing its economic team on crucial fiscal efforts.”

‘Floating Currency’

Rousseff also said that Brazil will let the real fluctuate freely and doesn’t intend to intervene in the market to defend the currency.

Even as the real has fallen the most among major currencies this year, the central bank scaled back support by ending sales of foreign-exchange swaps in March.

“What we are doing is a policy of floating currency, and we’ll continue to do that,” the president said.

Rousseff said spending cuts, including postponing some expenditures and reducing administrative costs, will account for a big part of the necessary adjustments to narrow the budget shortfall.

‘Huge Cut’

Her comments came hours after the release of a budget deficit that was twice as wide as forecast.

“We will carry out a huge cut” to this year’s budget, Rousseff said. “I will do everything to meet” the target.

Finance Minister Joaquim Levy has said spending cuts and tax increases are fundamental to avoiding a credit downgrade. He has pledged to boost the primary surplus, which excludes interest payments, to 1.2 percent of gross domestic product this year from a 0.64 percent deficit in 2014.

S&P Rating

Standard & Poor’s affirmed Brazil’s investment-grade credit rating last month, citing a “marked adjustment in various policies” to restore credibility.

The real tumbled 11 percent in 2014 after S&P cut the nation in March of that year to BBB-, the lowest level of investment grade. Moody’s Investors Service, which rates Brazil one step higher, cited a stalled economy and fiscal challenges when it put the country on negative outlook six months later.

Brazil’s currency extended its gain Wednesday after a smaller-than-forecast increase in U.S. company payrolls supported higher-yielding assets from emerging markets by dimming prospects that the Federal Reserve is in a hurry to raise interest rates.

“Weaker labor data in the U.S. ease concern that the Fed could raise interest rates sooner than expected, which would end up damping demand for emerging-market assets such as the real,” Correa said.

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s borrowing costs, decreased 0.14 percentage point to 13.24 percent.

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