Brazil's tumbling currency and Lula's budget

Brazil's currency was one of the world's worst performers last year as President Lula's budget plans spooked markets. The sharpest declines came in December; the central bank was forced to make its largest ever intervention in the currency markets, using more than USD 30 billion of its international reserves.

We've charted the weakening real over the course of 2024 and highlighted key time points.

Like many emerging-market currencies, BRL's weakness was in part the mirror image of USD strength and the "higher-for-longer" scenario for US interest rates. The Federal Reserve delayed rate cuts until mid-September, while the Brazilian central bank maintained a dovish stance until May.

In April, the real slumped as a series of strong US data prints coincided with a downward revision for Brazil's fiscal surplus.

Donald Trump's US election win also saw BRL under pressure as the president-elect's tariff vows drove USD higher.

On Nov. 28, Lula's government announced its new fiscal package, which included modest spending cuts and tax increases on the wealthy. Market reaction was swift: the dollar surged to the unprecedented level of BRL 6. The fiscal measures were deemed insufficient to reduce the public deficit and stabilize the growing public debt, which currently stands at 78% of GDP. That's up 7 percentage points from the 71.4% recorded at Lula’s inauguration in January 2023.

In December, in addition to the FX intervention, Brazil's central bank raised interest rates by 1 percentage point to 12.25%. That coincided with a Fed cut a week later. Still, the BRL remains significantly weaker than its November levels.

Latin America's largest economy had stayed hot through 2024, boosted by household and government spending; unemployment reached a historic low of 6.1% in November. That pace may be set to slow as the weak currency stokes inflation (which is expected to approach 5% this year) and prompts the central bank to tighten further; markets expect the key rate to reach 15% by the end of 2025.

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