Brazilian Markets Tumble as Bolsonaro Revives Social Program

Brazilian markets sank, forcing the central bank to step in to prop up the real, after President Jair Bolsonaro revived plans to launch a social program that investors fear could jeopardize a key austerity rule.

The Brazilian real lost as much as 2% on Monday after the government suggested that money for the program -- rebranded Citizen Income -- would come from limiting payments mandated by court decisions and redirecting resources from an educational fund known as Fundeb.

Brazilian Markets Tumble as Bolsonaro Revives Social Program

“We are looking for resources with fiscal responsibility and respecting the spending cap,” Bolsonaro said after a meeting with ministers and members of congress, adding he intends to send an emergency bill to congress in the coming days. “We want to demonstrate to society and investors that Brazil is a trustworthy country.”

Finding ways to finance his social program, previously called Brazil Income, has become a headache for Bolsonaro, who finds himself constrained by a constitutional cap that limits the growth of government expenditures. Earlier this month, visibly irritated by media reports that his government considered cutting other social spending to fund his plan, Bolsonaro said it was “forbidden to mention the words Brazil Income” until the end of his government.

Yet the president needs to find an alternative to assist millions of Brazilians who will soon stop receiving emergency payments given during the pandemic. Such cash handouts have sent his popularity soaring to a record even as the country became a global hotspot for the coronavirus, with more than 140,000 related deaths.

Spending Cap

The solution announced Monday caused unease within the country’s economic team, said two people with knowledge of the matter. Limiting court-ordered payments to bankroll the program is a temporary solution to a permanent problem, said the people, who asked not to be named because the discussions are not public.

Using money from Fundeb also raised concerns because those funds are excluded from the spending cap, so the solution could be seen as an attempt to weasel around the rule. Bruno Dantas, minister of the audit court responsible for analyzing government accounts, tweeted that the idea was a “trick to breach the spending cap.”

The Economy Ministry declined to comment.

BRAZIL REACT: Return of Creative Accounting Shows Fiscal Dilemma

Delaying court-mandated payments, known as “precatorios” in Brazil, was the only solution to fund Citizen Income without breaching the spending cap, Senator Marcio Bittar, the rapporteur of the bill that would create the program, said in an interview. He rejected allegations that using Fundeb money amounts to breaching the cap, saying the family that would benefit from the new program is the same that would benefit from the educational fund.

Fiscal Shortcuts

Investors fear Bolsonaro will eventually get rid of the spending ceiling to pay for his program and maintain his popularity.

“Instead of facing our biggest fiscal problem, the continuous growth of mandatory expenses, the government finds shortcuts with these sources of financing,” said Gilmar Alves Lima, an economist with BMG in Sao Paulo.

In congress, the sources of financing proposed by the government were criticized as well. “Changing Fundeb will bring problems with virtually everybody,” said Alexis Fonteyne, a lawmaker from the pro-market Novo party who attended today’s meeting with Bolsonaro.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.