The Brazilian Real is losing a lot of ground against the U.S. Dollar this Tuesday. The currency plunge comes after the Jair Bolsonaro administration on Monday announced a proposal to tame fuel prices — which would have states lifting goods and services taxes, only to be compensated by the federal government.
The move would cost the federal government an estimated BRL 25-50 billion (USD 5.1-10.3 billion) — and it is already strapped for cash as it is.
Fears that the move would put even more pressure on the federal budget led investors to sell off the local currency. At 4:40 pm, the USD was up by 1.96 percent to BRL 4.87.
“The market did not take the announcement well because it sends an awful message. It’s a tax waiver that is not followed by cost-cutting measures, and it has a clear electoral bias,” says Mario Sergio Lima, senior Brazil analyst for industry research Medley Advisors.
“Today, investors are asking themselves: what else might the government do if President Bolsonaro keeps on performing poorly in polls?” he adds.
With investors betting on a further deterioration of public accounts, interest rates have also gone up. In Mr. Lima’s view, this outlook gives the Central Bank little room to end the monetary-tightening process next week and scares away long-term investors focused on the country’s fiscal sustainability.
While the Brazilian currency plunged, the preferred shares of oil producer Petrobras were up by 1.7 percent. According to BTG Pactual analysts, the fact that the government is eyeing taxes to reduce fuel prices is actually positive for the company’s pricing policy, which has been heavily criticized by President Jair Bolsonaro in recent weeks.
“At least for now, the announcement reinforces that Petrobras’ pricing policy should remain untouched and that the burden to subsidize fuels should fall on the government, rather than the national oil company’s minority shareholders,” BTG Pactual wrote in a report.