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Local Assets Tumble as Fiscal Concerns Exacerbate Pessimism

BRAZIL
  • Sentiment in Brazil has been significantly rocked by the latest adjustments to the government’s fiscal objectives. Sell-side analysts have underlined how it reinforces a more bearish asymmetry to medium-term fiscal forecasts.
  • Furthermore, we highlighted that pressures may ramp up further with congress apparently leaning towards overturning a presidential veto that reduced parliamentary budget amendments by as much as BRL 5.6bn. In addition, there are also doubts over the bill to gradually restore the payroll tax exemption, which O Estado say could be discussed this week.
  • There have been broad and significant moves in local asset prices. USDBRL extended the week’s rally to 3.2%, the Ibovespa index has dipped 1.25% and swap rates have shifted aggressively higher.
  • DI swap contracts expiring in January 2029, are now roughly 60bps higher on the week, registering a 35bp adjustment on Tuesday. Fiscal concerns remain the key driver, however, Focus survey adjustments to the selic rate forecasts for 2024 have also been contributing.
  • BCB Governor Campos Neto said the work of the central bank becomes more difficult if there is a perception that there is no fiscal anchor. Additionally, government interference in public companies could be fuelling anxiety among investors.
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