(Mar 17): Brazil’s real slumped to a 12-year low and led global declines as Fitch Ratings said it’s reviewing the nation’s investment grade, citing challenges the government faces in reviving economic growth.
The real depreciated 0.7 percent to 3.2690 per dollar at 12:40 p.m. in Sao Paulo, the weakest level on a closing basis since April 2003. The drop was the biggest among 31 major currencies tracked by Bloomberg.
Speculation that a stalled economy and fiscal weakness will lead to a sovereign-credit downgrade has pushed the real down 19 percent this year. Finance Minister Joaquim Levy is planning to meet Fitch representatives Wednesday, according to a person close to the government’s economic team.
“Investors are anxious about Fitch’s meeting,” Sidnei Nehme, the executive director at NGO Corretora in Sao Paulo, said in a telephone interview. “While agencies have been patient to allow Levy some time to prove his plan works, improvements don’t happen overnight.”
Levy will stress the government’s commitment to meeting budget targets and promoting growth, according to the person, who isn’t authorized to speak publicly and asked not to be identified.
Tony Stringer, a Fitch managing director, said in Hong Kong that Brazil’s government has limited ability to stimulate growth through fiscal policy and cited the central bank’s increase of borrowing costs to curb inflation. An announcement on the nation’s sovereign rating may come in a few weeks, Stringer said. The company ranks Brazil at BBB, the second-lowest level of investment grade.
Moody’s Investors Service cited fiscal challenges and a stalled economy when it put Brazil on negative outlook in September, six months after Standard & Poor’s cut the nation to one level above junk. Neither rating company immediately responded to telephone and e-mail messages requesting comment.
Three-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among 16 major currencies. The decline in the currency Tuesday pushed its relative strength further below a level some traders interpret as a sign that its slide may be overdone.
To support the real and limit import price increases, Brazil sold the equivalent of $97.7 million of currency swaps as part of a plan to offer as much as $100 million a day until at least March 31. It rolled over contracts worth $350.3 million.
Swap rates on the contract maturing in January 2016, a gauge of expectations for changes in borrowing costs, declined 0.02 percentage point to 13.84 percent. To curb inflation, the central bank raised the benchmark lending rate on March 4 by a half-percentage point to 12.75 percent, the highest level since 2009.