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Brazil Finance Chief Remarks Fuel Fiscal Worries, Roiling Assets

(Bloomberg) — Brazil Finance Minister Fernando Haddad expressed concern about the country’s fiscal outlook during a Friday afternoon meeting with investors, tanking assets and sparking a public attempt to contain the damage.

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Haddad told investors that he would need to make significant spending cuts to hit the country’s fiscal target if Congress does not approve revenue measures he has proposed, according to multiple people with knowledge of the matter. He also spoke about the importance of discussing other ways to reduce spending, including delinking pension benefits from minimum wage increases, the people said.

But he left investors with the impression that he won’t be able to convince President Luiz Inacio Lula da Silva of the need to reduce spending, and that in the end he will have no choice but to change the fiscal framework that lawmakers approved last year, according to the people, who requested anonymity to speak about the discussions.

Haddad said that he will support a structural review of spending but did not appear confident that his efforts would win support from within the government, one of the people said.

Brazilian assets quickly extended losses following the meeting. The real slumped 1.7% against the US dollar, lagging only the Mexican peso among the world’s major currencies on Friday. Swap rates also surged — with contracts maturing in January 2027 jumping about 60 basis points.

The noise comes against a backdrop of several election shocks in places from India to Mexico, with global investors unwinding erstwhile popular trades within emerging markets.

The turmoil began as Haddad spoke to reporters in Sao Paulo. Haddad later returned to say that the market’s interpretation of the meeting had been “erroneous” and “unreasonable,” and that he had never indicated that the fiscal rules would change.

The government may freeze some funds from the federal budget if expenses grow beyond what’s expected, but that is “absolutely normal and in line with the fiscal framework,” Haddad said.

“What happened is very serious, you cannot use a closed meeting to sell to the market something that does not exist,” he said.

The finance chief has faced investor skepticism about his efforts to deliver on his goal of eliminating Brazil’s primary fiscal deficit, which excludes interest payments, this year, especially amid increasing pressure from Lula to spend more to boost Latin America’s largest economy.

Haddad in April eased next year’s fiscal target, but has maintained that his 2024 goal is within reach.

–With assistance from Barbara Nascimento.

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