Brazil’s Real Hits All-Time Low as Budget Cuts Fall Flat
November 16, 2022 – Brazil’s real plummeted to an all-time low against the dollar on Wednesday, erasing a small rally earlier in the day as budget cuts failed to boost investor confidence.
The currency fell as much as 2.6% to 6.57 per dollar, a record low, although it attempted to recover in late trading, closing at 6.47 per dollar.
The sharp drop came despite the government’s efforts to reassure markets by cutting spending, raising rates, and cutting debt to tackle a record budget deficit and soaring inflation.
The timing of the move by the government was criticized by some as coming too late and lacking a clear plan, disappointing investors.
“We expected more from the government,” said a Sao Paulo-based foreign-exchange trader. “They were just tinkering with the edges, and it was just too little too late for the market.”
The news sent ripples through the global markets, with other key currencies also taking a hit. The dollar rose 0.3% against the euro, while the yen dropped 1.1%.
The Brazilian real has been continually depreciating against the dollar, with the central bank losing some of its independence amid political pressure to print more money to stimulate the economy.
The latest budget cuts aimed to tackle the country’s massive deficit, which stands at a record 12.2% of GDP. The government has also raised interest rates to 13.5% and announced plans to cut debt to 75% of GDP by 2024.
However, these measures failed to boost market sentiment, reflecting fears that the country’s economic woes are more entrenched and less likely to be easily reversed.
The currency’s sharp drop also suggests that investors are skeptical of the government’s ability to curb the high inflation that has plagued the country.
“We are not seeing the commitment to structural reforms needed to change the country’s economic trajectory,” said a Buenos Aires-based emerging markets analyst. “Until they implement these reforms, we will continue to see the real weaken.”
With the election of Lula as the new president likely to bring change to the country’s economic policy, the markets are bracing for an uncertain economic path ahead.
