Brazil’s president Michel Temer has moved to shore up confidence in his reform programme after the country’s currency was one of the worst hit in an emerging market sell-off sparked by Donald Trump’s US election victory.
The Temer government on Saturday released a long list of its claimed economic and social achievements following six months in power after the real suffered its worst three-day loss last week against the dollar since 2008 with a 7.3 per cent depreciation.
It had fallen nearly 10 per cent in intraday trade before central bank intervention on Friday.
“This is a reminder that the political backdrops in several countries are very uncertain, particularly in Brazil,” said Neil Shearing, chief emerging markets economist at Capital Economics.
Brazil’s currency and stock market have soared since the impeachment of leftist former president Dilma Rousseff in August, leading to her replacement by Mr Temer, her more market-friendly vice-president.
The new president is pushing fiscal reforms through congress to plug a gaping budget deficit and pull Brazil out of recession, but is expected to face a stern challenge implementing the most important of these, an overhaul of Brazil’s pension system.
“On May 12, at the start of the new government, financial market projections for gross domestic product in 2017 were for growth of 0.5 per cent. Now, after our economic measures, the previsions are for 1.2 per cent growth,” the government said in its release on Saturday.
It took office in May, after Ms Rousseff was suspended from office pending her impeachment trial for budgetary crimes.
However, the real’s fall in the three days since Mr Trump’s shock victory on Tuesday had shown how Brazil remained vulnerable to any adverse shifts in external markets, analysts said.
Any sharp increase in US interest rates as a result of Mr Trump’s policies could draw capital away from Brazil, which depended on foreign inflows to counter its low domestic savings rate.
“Brazil’s capital account is quite open and the cost of access to external funding can be a lot more difficult and demanding,” said Alberto Ramos, economist with Goldman Sachs.
Fitch last week kept Brazil’s sovereign ratings outlook on negative citing the country’s ongoing challenges.
“The president’s low popularity, rising unemployment rate and lacklustre growth, and the ongoing Lava Jato [Car Wash] proceedings are risks for the political environment and could challenge reform progress,” Fitch said, referring to a sprawling investigation into corruption at state-owned oil company Petrobras.
The country’s currency was one of the worst performing after the Mexican peso, which surrendered about 12 per cent of its value against the dollar over the same period after the Trump victory.
Underlining the shock, the central bank intervened on Friday to strengthen the real against the dollar through the sale of foreign exchange swaps after months of selling reverse swaps, a measure that essentially weakens the currency.
Mr Shearing said unlike some of the other countries whose currencies had taken a battering, such as South Africa, Indonesia and Colombia, Brazil’s current account deficit had narrowed over the past year.
But the sell-off might represent a correction after sharp gains in the real this year of more than 20 per cent against the dollar.
Markets might also have to revise their projections on Brazilian interest rates, with the depreciation signalling potentially higher than expected inflation in the coming months.
“This has jolted investors in an environment where domestic politics in Brazil are still very uncertain. It may just have spurred a rethink,” he said.
Aside from pushing through reforms, Mr Temer is facing pressure from the Lava Jato investigations in which he and his party have been implicated.
He is also facing uncertainty from an action in the electoral court examining whether he and Ms Rousseff’s joint ticket in the 2014 elections should be annulled because of alleged campaign finance fraud.
This would mean Mr Temer’s removal from power and potentially the holding of fresh elections, though analysts say the odds of this happening remain unlikely.