Brazil’s Bolsonaro defends aid for poor as fiscal fears hit markets again

Brazil's President Jair Bolsonaro looks on during a ceremony of lowering the national flag for the night, amid the coronavirus disease (COVID-19) outbreak, at the Alvorada Palace in Brasilia, Brazil

Brazil’s President Jair Bolsonaro took to social media on Tuesday to hit back at accusations his government is using accounting gimmicks to fund a new minimum income program without breaking its spending cap, its most important fiscal rule.

Bolsonaro’s charm offensive comes as Brazilian markets were under pressure for a second day on fears the spending spree shows he is unwilling to take the tough decisions needed to rein in record deficit and debt, and get the public finances back to health.

Fiscal responsibility and the spending cap are the “rails of the economy,” wrote Bolsonaro, who critics say is pushing this scheme and the controversial way it is funded with an eye on the 2022 presidential elections.

“Those responsible for destroying millions of jobs are now silent. My government seeks to anticipate the serious social problems that may arise in 2021 if nothing is done to meet the needs of all these people who have lost everything, or almost everything,” he wrote on his social media sites.

Together with government leaders in Congress and Economy Minister Paulo Guedes, Bolsonaro on Monday announced a new welfare transfer program for the poor called ‘Renda Cidada’, an extension and expansion of the current ‘Bolsa Família’ cash transfer program.

Paying for Renda Cidada will involve an accounting maneuver allowing the government to tap into 55 billion reais ($9.7 billion) in the budget earmarked for future court-ordered debt payments to businesses and individuals, and cash set aside for education.

Brazilian markets balked. Stocks and the currency fell, while interest rates futures rose on Monday as investors viewed it as an accounting gimmick not to break the spending ceiling fueled by populist, political motives.

In early trading on Tuesday, the real and stocks were still lower and long-term borrowing costs were higher.

“If the administration does indeed decide to follow this course, we expect price action to continue trading poorly,” Citi strategists wrote in a note on Tuesday.

“We would not be surprised if the government drops this controversial solution after its negative repercussions in asset price, and among fiscal accounts specialists and important Congressmen like Rodrigo Maia, the Speaker of the Lower House,” they said.

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