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Brazilian markets slide as lawmakers grab at presidential budget power

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By Reuters
Brazilian markets slide as lawmakers grab at presidential budget power
FILE PHOTO: Brazil's President Jair Bolsonaro attends a signing ceremony for 13.2 billion reais in contracts for electricity transmission lines, at the Planalto Palace in Brasilia, Brazil March 25, 2019. REUTERS/Ueslei Marcelino   -   Copyright  Ueslei Marcelino(Reuters)

By Jamie McGeever

BRASILIA (Reuters) – Brazilian markets tumbled on Wednesday after a measure to seize more control over the federal budget received near-unanimous approval by Brazil’s lower house, adding to concerns President Jair Bolsonaro is losing momentum in his push for ambitious economic reforms.

Financial markets were also feeling the heat from a sputtering economic recovery and global growth jitters, in the latest sign the government’s signature pension reform plan faces an uphill battle.

The Brazilian real hit a 2019 low, trading weaker than 3.95 per dollar for the first time this year.

The bill takes some discretionary budget power away from the president and gives more to Congress. It was approved nearly unanimously by the lower house and will now go to the Senate for consideration.

Many see it as a message to Bolsonaro’s government about its lack of leverage in debate on the pension reform plan, aimed at saving over 1 trillion reais ($255 billion) in the next decade.

“The vote was not positive … but not major news, on the margin,” said one portfolio manager in Sao Paulo. “Social security reform is going to be a bumpy ride.”

In a statement, the powerful head of the lower house, Rodrigo Maia, denied the vote was an attack on the new administration, although he personally has been involved in verbal duels with members of Bolsonaro’s government

“This is not a … political measure, but an important innovation in the country’s budget culture,” he said, adding that the bill does not handicap the government.

The Brazilian real lost as much as 2 percent as it pushed past 3.95 per dollar for the first time in six months, and the benchmark Bovespa stock index fell almost 3 percent.

Interest rate futures jumped as investors bet a delay and dilution of fiscal reforms may force the central bank to raise interest rates. April 2020 rate futures rose to 6.71 percent, implying a roughly 85 percent chance of a rate hike within 12 months.

The late-night vote was the third obstacle for pension reform on Tuesday alone, after Economy Minister Paulo Guedes skipped a congressional hearing and a bloc of 11 political parties demanded the removal of changes affecting rural, elderly and disabled Brazilians.

While much of the federal budget is immune to unilateral adjustments by the executive branch, the latest measure, if passed by the Senate, further reduces the president’s control over discretionary spending.

The measure appeared to take the Bolsonaro administration by surprise. Shortly before the vote, Onyx Lorenzoni, Bolsonaro’s chief of staff, had said it was not a concern.

(Reporting by Jamie McGeever; Additional reporting by Gram Slattery in Rio de Janeiro and Camila Moreira in Sao Paulo; Editing by Brad Haynes, Jeffrey Benkoe and Bernadette Baum)