Thursday, December 9

Brazil’s real hit by fiscal concerns, Latam FX recovers


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Brazil’s real dropped close to six-month

lows on Tuesday as government plans for more welfare raised

concerns of stretched fiscal spending, while most other Latin

American currencies recouped some recent losses as the dollar

retreated.

The real tumbled 0.6% to 5.5531 to the dollar,

trading around levels last seen in April as the speaker of the

lower house of Congress signaled he might be open to discuss the

introduction of a welfare program that could break the country’s

spending ceiling.

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Reuters also reported that Brazil’s government is

considering combining COVID-19 pandemic relief payments and

family welfare programs into a monthly stipend next year.

But the intended reforms have brought into question whether

the government will be able to foot the bill, especially

considering that fiscal spending was already stretched due to

the pandemic.

A higher budget deficit and more debt issuance are likely to

damage Brazil’s financial credibility. Rising inflation is also

expected to erode growth in Latin America’s largest economy.

Brazilian stocks also slumped 1.9%, with financial

stocks sensitive to interest rates weighing the most.

Other Latin American currencies fared better, recovering

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from recent losses made on concerns over slowing Chinese

economic growth.

Mexico’s peso rose 0.5%, while Colombia’s peso

inched up as it resumed trade after a holiday. But most emerging

market currencies have tumbled in recent sessions, as investors

grew increasingly concerned over rising inflation.

While emerging market central banks are expected to tighten

policy to cope with higher prices, they also run the risk of

raising rates too quickly and further hampering growth.

“The risk is that markets and central banks misread the

current shocks, leading to fast-rising inflation expectations or

premature monetary tightening,” analysts at BlackRock wrote in a

recent note.

“We expect this to play out differently around the world,

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and could see central banks that worry about their handle on

inflation expectations take a more hawkish approach than

others,” they said.

Most central banks in Latin America have already begun

hiking rates, with Brazil and Mexico leading the charge.

Chile’s peso rose 0.4%, tracking strength in copper

prices as supply disruptions Peru, a major producer, drove up

rates for the red metal.

Peru’s sol fell slightly after a community said it

will block a key mining road used by the Las Bambas copper mine

in protest after failed negotiations with the government.

Key Latin American stock indexes and currencies:

Latest Daily% change

MSCI Emerging Markets 1295.75 0.99

MSCI LatAm 2241.11 -1.42

Brazil Bovespa 112298.76 -1.86

Mexico IPC 52548.74 -0.26

Chile IPSA 4018.89 0.25

Argentina MerVal – –

Colombia COLCAP 1418.91 -0.51

Currencies Latest Daily% change

Brazil real 5.5531 -0.59

Mexico peso 20.3060 0.48

Chile peso 813.8 0.36

Colombia peso 3765.83 0.02

Peru sol 3.9418 -0.02

Argentina peso 99.3000 -0.02

(interbank)

(Reporting by Ambar Warrick

Editing by Paul Simao)

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