Brazil Markets Plunge as Bolsonaro Vows to Dole Out More Aid

(Bloomberg) -- Brazilian assets tumbled Thursday as prospects the government will bypass fiscal rules to boost spending fueled concern over the nation’s fiscal trajectory. 

The benchmark stock index dropped 2.8%, extending its decline this week past 6%, and interest-rate swap contracts surged as traders weighed President Jair Bolsonaro’s pledge to offer aid to truckers and news his administration will seek to change how the spending cap that limits the growth of public expenses is calculated. 

The government is seeking budget space for a new social program that Bolsonaro has been pushing for as he seeks to boost his record-low popularity before 2022 elections. The plan is to use the previous year’s inflation to adjust public spending limits, instead of the inflation of a 12-month period ended in June, as required under current rules.

BRAZIL INSIGHT: Waiver Chatter Signals Spending Cap’s Demise

Amid concern about fiscal largesse, traders have boosted bets the central bank will hike the benchmark rate by 125 or even 150 basis points when members meet next week, according to data from local exchange B3. That would be the biggest increase in almost two decades after the bank already raised interest rates by more than 4 percentage points this year.

The change to the budget rule, being debated in the lower house, will free up about 40 billion reais ($7 billion) for spending, according to people familiar with the matter. The government hopes the bill will be voted on today by a commission, and be taken to the house floor soon after, the people said, asking not to be identified because discussions are private.  

The bill also creates a yearly limit for court-ordered payments, which frees up around another 40 billion reais, bringing the total budget room to about 80 billion reais. 

The president, who’s seen his popularity slide amid soaring food and fuel inflation, said on Thursday that the government will give a payment to truck drivers to offset the impact of higher diesel prices. Bolsonaro, who’s up for re-election in 2022, gave no details on how he’ll fund the aid, which should help about 750,000 self-employed truckers. O Globo newspaper reported the monthly stipend is expected to be at 400 reais and should be valid until December of next year.  

The Ibovespa stock index fell to an 11-month low, with the daily decline the biggest among more than 90 primary global indexes tracked by Bloomberg. The Brazilian real weakened 0.9%, while swap rate contracts due in January 2023 surged 61 basis points. 

READ MORE: Brazil Swap Rates in Panic Mode On Reports of Extra Spending

Undermining the spending cap will keep downward pressure on asset prices until the government moves to reassure investors about its fiscal health, Carlos Woelz, a founding partner at hedge fund manager Kapitalo Investimentos, said at an event. 

“It looks like magic: You spend more, no expenses are cut. No one pays the bill,” Woelz said. “That won’t work.” 

©2021 Bloomberg L.P.