Brazil nixes welfare expansion announcement amid currency sell-off

Brazil's central bank has already raised interest rates by 4.25 percentage points this year to fight double-digit inflation.
Brazil's central bank has already raised interest rates by 4.25 percentage points this year to fight double-digit inflation.PHOTO: REUTERS

BRASILIA (REUTERS) - Brazil's government cancelled an announcement for a generous new welfare program on Thursday (Oct 21), after a central bank currency intervention failed to calm market concerns about looser government spending ahead of next year's election.

President Jair Bolsonaro, who has seen his poll numbers fall over his mishandling of the pandemic, a weak economy and rising inflation, summoned ministers for a 5 pm announcement of the new welfare program, according to a document seen by Reuters.

But just minutes before the official release of the expanded welfare plan, which had spooked investors and deepened real losses against the dollar, the event was suspended, a spokesperson for the citizenship ministry said.

The news of the expanded welfare plan came on the same day as a central bank intervention to prop up the real. The bank sold US$500 million (S$672.35 million) in a spot auction after a week of expanding currency swap sales that have failed to support the currency.

Despite the intervention, the benchmark Bovespa stock index ended the day down over 3 per cent, the real slid around 1.4 per cent.

According to a source with knowledge of the situation, the event was cancelled as the government was unable to settle on the final text. No further date for the event has been given.

A second source, speaking on condition of anonymity, said earlier on Tuesday that the government planned to expand the 'Bolsa Familia' stipend, which now costs 34.7 billion reais (S$8.36 billion) annually. Under the proposal, the government would add some 50 billion reais in new temporary funding, renaming the program 'Auxilio Brasil.'

The new policy, which would pay some 400 reais per month to 17 million families, represents a defeat for Economy Minister Paulo Guedes, who had drawn the line at 300 reais and tried to keep the program within the spending cap, the source said.

Newspaper O Estado de S.Paulo reported that some 30 billion reais would be counted outside the spending cap. An O Globo columnist reported that 50 billion reais would be exempted.

It remains to be seen if the government will now modify its plans for the scheme. The Economy Ministry did not respond to a request for comment.

Currency under pressure

Investors in the real have been spooked by political risks, a fragile economic recovery and the prospect for rising interest rates in more wealthy economies.

Those concerns came into clearer focus on Tuesday, with growing rate-hike bets in markets such as Britain, where a cumulative rise of 35 basis points has been priced in by the end of the year.

Brazil's central bank has already raised interest rates by 4.25 percentage points this year to fight double-digit inflation and signalled 100-basis-point hikes at upcoming meetings, while stressing the need for continued fiscal discipline.

Rattled by the outlook for looser spending, interest rate futures surged as much as 50 basis points for 2024 and onward, while pricing in a more aggressive 1.25-percentage-point hike at the next policy meeting this month.

The government is facing growing political pressure to spend more, as an economic recovery sputters, with unemployment stuck near 14 per cent and poverty soaring.

In an interview published late on Monday by news magazine Veja, Arthur Lira, the speaker of the lower house of Congress, defended new social spending outside the spending cap limit.

Lira told Veja that the Covid-19 pandemic's terrible impact in Brazil, home to the world's second-highest coronavirus death toll after the United States, meant that fiscal responsibility could not be prioritised over the urgent needs of the most vulnerable.