The spending cut plan disappoints the market as the Brazilian real falls to an all-time low

According to the Zhitong Finance APP, the Brazilian real has fallen to its historical low, mainly due to the Brazilian government's latest proposed spending cuts of $12 billion and the failure of specific commitments to instill much confidence in investors. When trading began on Thursday, the real fell by 1.1% against the dollar, reaching 5.99 reais per dollar, breaking below the intraday low of 5.97 reais per dollar seen during the COVID-19 pandemic in May 2020. So far this year, the real has depreciated by over 19%, making it the worst-performing sovereign currency among emerging markets.

Measures announced by Brazilian Finance Minister Fernando Haddad include limiting the increase in the minimum wage, capping high salaries for public administration employees, and imposing higher taxes on those with monthly incomes exceeding 50,000 reais. The government also decided to exempt incomes of up to 5,000 reais from income tax; however, this move has sparked pessimistic market sentiment, as traders believe it will weaken the fiscal impact of the plan.

Brazilian assets have been severely impacted by growing pessimism regarding the country's increasing budget deficit. Since taking office in 2023, Brazilian President Luiz Inácio Lula has significantly increased spending to fulfill promises to improve the living standards of impoverished Brazilians.

This year, as the Brazilian government has dealt with various disasters, including historic flooding, widespread forest fires, and record droughts, the already heavily indebted public finances have faced additional budgetary pressure.

The growing distrust in the Brazilian government's fiscal commitments has also dampened inflation expectations, with the rising budget deficit pushing up benchmark government bond yields, prompting the Brazilian central bank to choose to raise interest rates against the trend as the Federal Reserve eases monetary policy. Swap rates in the Brazilian financial market have surged, indicating that policymakers will have to continue raising rates to curb the worsening budget deficit and inflation outlook.

This decline also coincides with the widespread depreciation of emerging market currencies following Donald Trump's election as U.S. President. Trump's "pro-growth policies" surrounding deregulation and tax cuts, along with the "MAGA policies" that include increased tariffs and immigration crackdowns, are likely to strengthen the dollar against global currencies and exacerbate inflation in the world's largest economy, forcing central banks worldwide to maintain higher benchmark rates for a longer period to support their sovereign currencies, while prolonged high rates will suppress economic growth in emerging markets. These prospects have heavily impacted the stock and bond assets of emerging markets recently.

The Brazilian sovereign currency, the real, has led declines among developing economies, as there are signs that the Brazilian government is abandoning fiscal responsibility commitments under debt pressure, severely damaging local assets. The Brazilian stock market has also lagged behind most major benchmark indices, as investors anticipate a sharp slowdown in Brazilian economic growth and sustained rising interest rates—JP Morgan and Morgan Stanley both downgraded their ratings for the Brazilian stock market in November, primarily due to the continuously increasing budget deficit and the likelihood of rising interest rates