SAO PAULO — On Wednesday, Brazil’s currency, the real, plummeted to its lowest value against the U.S. dollar since its introduction in 1994, largely due to investor dissatisfaction with President Luiz Inácio Lula da Silva’s attempts to control government expenditures.
A proposed legislation that aims to cut 70 billion reais (approximately $11 billion) in governmental spending is currently being discussed in Brazil’s lower house of Congress. However, some market analysts have expressed that these efforts may not be enough to stabilize Brazil’s financial situation.
On that day, the real lost 2.8% of its value, falling to 6.26 per dollar. This marks the strongest depreciation the currency has encountered in nominal terms amid Brazil’s economic fluctuations characterized by cycles of growth and high inflation.
Throughout the year, the real has seen a decrease of nearly 23% against the U.S. dollar. While the lower house made progress on less contentious aspects of the bill late Tuesday, critical components, including proposals to limit increases in the minimum wage, are still pending a vote. Additionally, the Senate must approve whatever the lower house decides, and Congress is scheduled to adjourn on Friday.
In efforts to curb the decline of the real, Brazil’s central bank has intervened in local currency markets multiple times, but these measures have not yet been successful in halting the currency’s downturn. Economists warn that the ongoing weakness of the real may lead to rising import costs for Brazil, potentially triggering inflation as soon as January.
Analyst Mario Sérgio Lima from Medley Advisors pointed out, “The government is putting forward a package that many view as inadequate, and there are expectations that it will be watered down in Congress. Adding to that is a proposal to boost spending via income tax.” He further commented on the currency’s status, saying, “The real at 6 per dollar is acceptable, but approaching 6.30 seems excessive.”
President Lula, who is currently recovering from surgery to address a brain hemorrhage, conveyed on TV Globo that his administration is committed to fiscal responsibility, downplaying the financial market’s apprehensions. “The real concern about government spending should not be on the market, but rather on our administration. If I fail to control spending, it is the impoverished who will suffer the consequences,” he stated.
Additionally, Brazil’s Economy Minister, Fernando Haddad, remarked that the recent sharp decline of the real does not accurately reflect the country’s economic conditions, emphasizing improvements in inflation and unemployment rates. He stated, “There are claims of speculation, even from reputable journalists. Our currency operates on a floating basis, and currently, with some uncertainties in Congress, we are observing fluctuations in its value. However, I am confident it will stabilize.”