Brazil's Real Weakens as Fiscal Concerns Mount

The Brazilian real weakened 1.2% to 5.95 per dollar on Tuesday, its worst level since October 2025, after Finance Minister Fernando Haddad announced a 2026 primary deficit target of -0.5% of GDP, wider than the -0.25% that fiscal hawks had been hoping for.

The announcement follows weeks of political pressure on President Lula to increase social spending ahead of the 2026 midterm elections. The expanded deficit target effectively shelves plans for a primary surplus that had been a key credibility anchor for Brazilian assets.

Brazilian sovereign bond spreads widened 18bps to 245bps over US Treasuries, the highest since August 2025. The Ibovespa stock index fell 1.4%, with banks and utilities leading the decline.

Banco Central do Brasil, which has been holding rates at 13.25% while peers cut, faces an increasingly difficult balancing act. Rising inflation expectations (now at 4.8% for 2026) and fiscal concerns argue against easing, while the economy shows signs of slowing.

"Brazil has all the ingredients for a local market sell-off," warned Marcus Chen. "Loose fiscal policy, a hawkish Fed, and political uncertainty are a toxic combination for EM assets."