U.S. dollar soars in Brazil on risk of government breaching spending cap

RIO DE JANEIRO, BRAZIL – The greenback appreciated 1.81% in the first minutes of Thursday (21) and was still trading at R$5.65 for buying and selling in early afternoon.

Turbulence in the foreign exchange market reflects statements by Economy Minister Paulo Guedes on the government’s plans to finance a social benefit program through the end of 2022, an election year in which President Jair Bolsonaro intends to run.

Guedes, a Chicago School orthodox liberal, said the day before that the government is considering requesting a “temporary exemption” from the spending cap to be able to pay these benefits, which would cover some 17 million Brazilians, compared to the 14.7 million currently assisted.

The government also confirmed that it intends to increase these subsidies to R$400 (US$70) per month from November this year until the end of 2022, which would mean an increase of 20% in the budget allocated for benefits.

In absolute figures, this measure would cost a total of R$89 billion, a third of which would be outside the established spending cap.

Should these plans materialize, financial analysts believe that they will aggravate the fiscal crisis the country is experiencing, and that growth could also be affected, after the sharp 4.1% drop in 2020 due to the coronavirus pandemic.

Latin America’s largest economy is also suffering with unemployment at record levels, above 14%, and rampant inflation that has exceeded 10% year-on-year.

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