Brazil’s Real Gains as Lower House Approves Tougher Fiscal Rules

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(Bloomberg) -- Brazil’s real was among the best performing currencies in emerging markets after the lower house approved a slightly stricter version of President Luiz Inacio Lula da Silva’s fiscal plan, signaling the government is trying to address investor concerns about overspending.

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The real gained as much as 0.7%, outpacing gains in most developing-nation currencies, while long-dated swap rates fell about 10 basis points on Wednesday morning.

The bill, which is designed to shore up Brazil’s public finances and replaces a so-called spending cap that had been in place to limit expenditures, was backed by 372 representatives in a vote late on Tuesday. Less than one-third of lawmakers, or 108 votes, were against the proposal.

An earlier draft of the text allowed the government to boost spending by 2.5% above the inflation rate, limited to 70% of its revenue growth. The text approved tweaked the percentage of real growth of expenditures to a range of 0.6% to 2.5%.

House representatives now have to vote on amendments that can still change the main text of the bill before sending the proposal to the senate, where it needs the support of 41 of the chamber’s 81 lawmakers.

The vote is a critical step toward “greater economic security,” which will allow the government to “invest more, foster growth and even contribute to a downward trajectory in today’s interest rate,” Institutional Relations Minister Alexandre Padilha told journalists on Tuesday.

The proposal originally presented by Finance Minister Fernando Haddad was sent to congress in April as part of government efforts to allay investor concerns about Brazil’s finances under Lula and to give the central bank room to lower interest rates, considered by the president as the main obstacle to growth.

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The government would be forced to reduce spending if revenue comes in below its estimates, including delaying some payments, freezing the salary of public workers and halting new hire.

--With assistance from Simone Iglesias and Davison Santana.

(Recasts story with market reaction.)

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