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Commerzbank Note BRL Investors Continue To Question Policy

BRAZIL
  • Commerzbank have said the fiscal situation and debt sustainability has been a thorn in the side of investors for some time. Lula will have to manage to improve it, either with the help of spending cuts or increased revenue. Not an easy task in times of high inflation and the deep political division of the country. The prospect of higher spending is likely to make investors even more sceptical and might put them off completely.
  • Two questions will therefore be decisive for the real over the course of the year:
    • Will Lula get control of the fiscal situation or will it deteriorate under his government due to an adjustment of the spending cap and higher spending?
    • How will the BCB react to the development of the budget? Will it remain an anchor of stability for the real?
  • Times are likely to get tough for the real. If investors question Lula’s budget policy and the BCB’s monetary policy it is likely to depreciate rapidly; with the bigger risk likely to be fiscal policy though.
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