Brazil Congress Again Waters Down Fiscal Plan as Real Sinks

Brazil's real currency has reached its lowest level since its introduction in 1994, as investors express frustration with President Luiz Inácio Lula da Silva's efforts to rein in government spending. The real shed 2.8% of its value against the U.S. dollar on Wednesday, depreciating to 6.26 per dollar. This year, it has lost nearly 23% of its value against the U.S. currency.

The Brazilian real's depreciation has been exacerbated by Congress watering down the government's fiscal plan, which aims to slash 70 billion reals ($11 billion) in government spending. The lower house passed some less-divisive elements of the bill, but key parts, such as restrictions to increases in the minimum wage, have yet to be taken up for a vote. The Senate also needs to vote on what the lower house approves, and Congress adjourns on Friday.

Economists warn that the real's weakness could trigger inflation as soon as January, as increased costs of Brazilian imports drive up prices for consumers. The government's fiscal plan is seen as insufficient by some market players, and it is expected to be watered down further in Congress. The real at 6 per dollar looks acceptable, but nearing 6.30 looks like an exaggeration, according to analyst Mario Sérgio Lima, from Medley Advisors.

Lula, who is recovering from surgery to stop a brain bleed, told TV Globo on Sunday that his administration is fiscally responsible and downplayed concerns in the financial markets. However, Brazil's Economy Minister Fernando Haddad acknowledged that the real's steep depreciation does not reflect the realities of the country's economy, noting that inflation and unemployment figures are improving.

The real's depreciation negatively impacts the competitiveness of Brazilian exports, making them cheaper for foreign buyers, while increasing the cost of imports, which could fuel inflation. A weaker real also reduces the value of foreign investments in Brazil, further discouraging capital inflows.

Political uncertainties and fiscal policies in Brazil significantly impact the real's exchange rate and foreign investment inflows. The Brazilian real has depreciated due to concerns over the government's fiscal discipline, with the currency reaching its weakest level since its introduction in 1994. The real's slide has been exacerbated by Congress watering down the government's fiscal plan, which aims to slash 70 billion reals ($11 billion) in government spending. Investors' frustration with the government's efforts to rein in spending has led to a sell-off in the real, making it less attractive for foreign investors.

The dilution of Brazil's fiscal plan by Congress could exacerbate inflation and hinder economic growth. The real's depreciation, driven by investor frustration with the government's spending cuts, may increase import costs and trigger inflation as early as January. With a tight labor market fueling wage growth and weak productivity, inflation could accelerate further. The central bank may need to raise interest rates to combat inflation, potentially slowing economic growth.

The weakening of Brazil's fiscal plan by Congress could erode investor confidence and deter foreign capital inflows. A less stringent fiscal policy may exacerbate inflation and increase the likelihood of a credit downgrade, making Brazil less attractive to international investors. The real's depreciation, already at its lowest level since 1994, could further discourage foreign investment.

A balanced portfolio, combining growth and value stocks, including under-owned energy stocks, could help investors navigate this uncertain environment. Maintaining confidence in enduring companies like Amazon and Apple can also help mitigate risks.



The watered-down fiscal plan may exacerbate Brazil's trade deficit in the short term, as reduced government spending could slow economic growth and exports. However, in the long term, a more balanced fiscal policy could boost investor confidence, attracting foreign capital and strengthening the real.

In conclusion, Brazil's real currency has depreciated due to investor frustration with the government's fiscal discipline and Congress watering down the fiscal plan. The real's weakness could trigger inflation and make Brazil less attractive for foreign investors. A balanced portfolio approach and maintaining confidence in enduring companies can help investors navigate this uncertain environment. The long-term impact of the watered-down fiscal plan on the real's exchange rate and Brazil's trade balance remains to be seen.