Share etherfuse
Inflation and government spending are critical to monitor. Government spending supports people in need, and inflation eats up spending power. Countries with a high percentage of low-middle income people are impacted the most by government spending levels and inflation, like Brazil.
Regarding inflation, it seems Brazil learned how to slay the inflation dragon. In June 2022 inflation was around 12%. Now, inflation now hovers around 4%.
With such a track record you would think the currency would be rewarded. It hasn't been. Since mid-2022 the Brazilian Real versus the USD has decreased in value by about 25%.
A weak currency fuels inflation, as prices of imported goods go up in local currency terms. Inflation would probably be less with a stronger Brazilian Real, cheaper foreign goods.
Currency values reflect investor sentiment. Brazil's success at taming inflation should have boosted sentiment. It didn't.
The main concern is government spending. Brazil's government is spending more money than it takes in. The budget deficit (government money spent versus money taken in) as a percentage of GDP was 13.3% in 2020 and declined to 8.9% in 2023. Good direction, but still not great.
Costs are the problem, especially interest payments, which now account for more than 25% of government revenue.
To tackle this situation, the Brazilian government announced a 70 billion Real spending cut in the next two years, and the market liked it, leading to a 1% gain in the currency against the US dollar.
All was good until President Lula spoke on TV declaring the real problem with government finances was high interest rates. Spending got short shrift.
Brazil is like a consumer looking to refinance a high interest credit card with a lower cost home equity loan. They get excited about paying less interest per month, but spending stays high, and the negative balance lives on.
To make matters worse, the Senate approved a plan to cut spending by 69.8 billion Real plan, short of the original 70 billion.
Going forward it will be key to gauge progress on the fiscal front. The government has put forth a reduction of 69.8 billion Real. Will it happen? Some doubt that even the 69,8 billion number will be met. Stay tuned.
On a positive note, all this uncertainty is creating attractive yields on Brazilian Tesouros, achieving their highest yields December 2023.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
