Brazil’s New Fiscal Plan Is Boosting the Real, Treasury Secretary Rogelio Ceron Says

Bloomberg — Brazil’s new fiscal plan is helping to boost investor confidence in Latin America’s largest economy, increasing demand for its local bonds and fueling a currency rally, according to Treasury Secretary Rogerio Ceron.

The Brazilian real is strengthening among emerging-market peers despite the outlook for lower interest rates because investors are growing optimistic that a new fiscal framework proposal will succeed in shoring up public finances, Ceron said Wednesday in an interview.

“There were a lot of questions about what would happen with fiscal policy, he said in his office in Brasilia. “Those doubts have been dispelled and there is now greater acceptance of the new rule.”

Demand for government bonds has increased among investors, including foreigners, Ceron said. In particular, appetite for fixed-rate bonds has been growing, a sign that investors expect interest rates to fall soon, he added.

The Brazilian real has climbed 2.6% since the announcement of the fiscal plan, leading gains among emerging-market currencies.

VIEW +

Autonomy Capital’s Robert Gibbins Sees ‘Credit Mess’ Fueled by Brazil Rates

Policymakers in Latin America’s largest economy led an aggressive monetary tightening campaign that hiked interest rates to 13.75% from an all-time-low of 2% in less than 18 months to tame inflation

Brazil’s fiscal framework sets a ceiling and a floor for the expansion of public expenditures, limiting it to 70% of the revenue growth, or 50% when the government fails to meet its budget surplus targets. Primary spending, however, will always increase between 0.6% to 2.5% a year, even if the economy shrinks.

It targets a primary fiscal surplus of 0.25% to 0.75% of gross domestic product for 2025 and 0.75% to 1.25% of GDP for 2026. For 2024, the goal is to eliminate the primary fiscal deficit, which doesn’t take into account interest payments, but the range of tolerance would still allow for a gap of 0.25% of GDP.

In case government fails to comply with the target, the economic team will have to limit spending with measures that include avoiding new tax cuts or exemptions, according to Ceron.

Fine Tuning

The economic team is fine tuning the proposal before sending it to congress to prevent that extraordinary revenues are used to boost expenses, according to Ceron. Extraordinary revenue that leads to a higher-than-expected primary surplus will be partly used to finance public investment, and partly do reduce public debt, he said.

Extraordinary income will also be excluded from the spending rule to ensure that only recurring revenues are used as a reference to calculate how much public spending can grow, he said.

Read more on Bloomberg.com