Brazil’s Government Unveils Measures to Achieve $11.8 Billion in Savings, But Market Remains Anxious
Brazil’s government revealed spending cuts aimed at achieving over 70 billion reais ($11.8 billion) in savings over the next two years to support its new fiscal framework, but the market remained anxious. The measures, which included an increase in tax exemptions, surprised investors and raised concerns that the government was relying on overly optimistic fiscal projections.
The Brazilian real ended at its weakest closing level ever at 5.99 per dollar, while interest rate futures rose further and the stock index fell 2%. Barclays said the highly anticipated measures to curb expenditures were overshadowed by income tax reform plans aimed at easing the burden on the middle-class, which limited the credibility of the measures and required a firmer response from the central bank.
The central bank had previously called for structural measures to control spending, accelerating its tightening pace in November with a 50 basis-point hike that brought interest rates to 11.25%. JP Morgan said it viewed the government’s fiscal estimates as too optimistic and predicted the central bank would hike rates by 100 basis points in the next meeting.
Finance Minister Fernando Haddad sought to calm the market, saying that the broader income exemptions would carry a 35 billion reais fiscal impact that would be fully neutralized by compensatory measures, taking effect only in 2026 after Congressional approval. The government plans to set a higher effective tax rate for the wealthiest, with a rate of 10% for individuals earning over 1 million reais annually, and end the income tax exemption for retirees with severe illnesses or who suffered accidents and earn above 20,000 reais per month, among other measures.
