Brazilian stocks unsurprisingly down as Bolsonaro prepares to breach spending cap

The Brazilian stock market had one of its worst days of the year on Thursday, falling nearly 3 percent. Investors have ditched Brazilian assets after it became clear that the government is willing to poke several holes in the federal spending cap to create a new cash-transfer program in the hope of boosting President Jair Bolsonaro’s re-election chances. Meanwhile, the Brazilian currency lost 1.91 percent against the U.S. Dollar.

At one point, losses topped the 4-percent mark, but eased after news that Congress could approve a cap on court-ordered payments (IOU bonds known as precatórios) to free up some space in the federal budget.

On Wednesday, Economy Minister Paulo Guedes talked about obtaining a “license to spend” from Congress. Starting next month, the government plans to hand out monthly payments of at least BRL 400 (USD 71) to poor families — with part of the funds coming from extraordinary credit that does not come under federal expenditure limits.

While the amount funded outside the cap is slim (BRL 30 billion), investors believe it is the tip of a fiscal irresponsibility iceberg, with lawmakers given license to jack up their own budgetary grants — money they use to fund projects in their own constituencies. 

On Tuesday, the government already saw a sample of how markets would react to any increase in public spending, with the Ibovespa benchmark stock index crashing 3.28 percent. But with the publication of the Covid inquiry’s final report — which accuses Mr. Bolsonaro of nine pandemic-related crimes — the president felt the urge to push on with a measure that will improve his image among voters. 

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