| SAO PAULO
SAO PAULO Dec 29 Brazil's real currency and
stocks closed 2016 with the best yearly performance in seven
years, boosted by hopes that centre-right President Michel Temer
would curb public spending following the ouster of his leftist
predecessor Dilma Rousseff.
The real firmed 21.5 percent in 2016, breaking a
five-year losing streak. It was by far the best-performing
currency in Latin America, and second only to the Russian rouble
among emerging markets.
Between 2011 and 2015, the real had lost more than half of
its value as concerns over Brazil's ballooning public debt added
to an emerging market rout.
Brazil's benchmark Bovespa stock index rose 38.9
percent in 2016 and advanced 68.8 percent in dollar terms, the
world's best performing emerging market.
Shares in state-controlled firms led the gains, with oil
company Petróleo Brasileiro SA and lender Banco do
Brasil SA doubling. Markets will be closed on Friday
ahead of the New Year's Day holiday.
Whether the rally will continue hinges on Temer's ability to
deliver fiscal and structural reforms amid corruption
accusations encircling senior figures in his administration,
Meanwhile, doubts linger about U.S. President-elect Donald
Trump's pledges of heavy infrastructure spending and tax cuts.
If the Federal Reserve reacts by increasing rates faster
than expected, that would likely weigh on demand for
high-yielding Brazilian assets, according to Jason Vieira, chief
economist at Infinity Asset Management Ltda.
"It's hard to decipher which of these forces will prevail,"
Analysts polled by Reuters this month expected the real to
weaken to 3.49 to the dollar in the next 12 months, from 3.25
currently. The estimates ranged between 2.98 and 3.88 reais, a
sign of increased uncertainty.
Temer took over from Rousseff after she was impeached for
allegedly meddling with fiscal accounts. He has pledged to
reverse the interventionist policies of her first term in a bid
to end Brazil's deepest recession in decades.
Temer's government is likely to meet its target for the
primary deficit - excluding debt payments - of 163.9 billion
reais ($50.4 billion) in 2016, which it aims to cut to 143
billion reais next year.
Nevertheless, it forecasts gross debt to grow to 76.9
percent of gross domestic product (GDP) in 2017 from 70.5
percent in November.
Markets have cheered his administration's decision to impose
a ceiling on growth in public spending, which was approved by
Congress this month. He has also proposed reforms to the
country's pension system, labor laws and tax code.
But corruption accusations against senior government
figures, including Temer himself, could weaken the ruling
coalition and derail reform efforts.
Volatility driven by the political newsflow, as well as
Trump's unexpected victory, led Brazil's central bank to halt
It has stayed out of the market since Dec. 13 after
intervening on a near-daily basis since the beginning of the
Many traders expect it to return to selling traditional
currency swaps, which function like selling future dollars, in
order to smooth potential volatility early next year.
"It is likely that the central bank will roll over at least
some of the swaps maturing in February," Cleber Alessie, a
trader with H. Commcor DTVM Ltda brokerage, said.
"It is not in its interest to let them all expire and
pressure the real given what is to come in 2017."
The central bank holds $26.6 billion worth of swaps in its
balance sheet, down from over $100 billion late last year. About
$6.4 billion worth of swaps are set to expire on Feb. 1.
(Reporting by Claudia Violante and Bruno Federowski; Writing by
Bruno Federowski; Editing by Bernadette Baum and Nick Zieminski)