By Marcela Ayres

BRASILIA, Reuters – Brazil’s stock and currency fell on Friday after the economy minister denied rumors that he was stepping down. He also appointed an ex-planning Minister to replace a Treasury official who resigned over his plans to increase spending in the run-up to the 2022 elections.

Paulo Guedes, Economy Minister, said that he will remain and announced Esteves Colnago’s appointment to the position of Special Treasury Secretary Bruno Funchal. Esteves Colnago is a former civil servant at central banks.

Guedes stated to journalists that Funchal’s resignation was natural, given his disagreement with the Constitutional Spending Cap being altered in order for him to spend more on a far-right President Jairbolsonaro’s expanded welfare program.

Guedes joked with Bolsonaro that he was aware of government allies looking to replace him in the economy ministry. But he stated that he has full confidence in Bolsonaro.

Guedes stated that he had not asked for his resignation despite a tug-of war with the government’s political wing.

After falling more than 4 percent, the benchmark stock index recovered to just 1% during afternoon trading. To strengthen 0.5% against US dollar, the real lost more than 1% and reversed its losses.

Funchal was one among the four Treasury officers who decided to resign on Thursday, according to Economy Ministry.

Bolsonaro and his allies won victory late Thursday in Congress for raising the Constitution spending limit to stagger government-orded debts. The bill’s sponsor stated that this would leave room for additional spending of $14.7 billion ($84 billion) next year.

Bolsonaro, whose popularity is declining in the run-up to the 2022 presidential elections and an inquiry by the Senate calling for him to be charged with criminal conduct over the handling of the coronavirus epidemic, has pledged to pay more than twice the monthly welfare payments to the country to 400 reais.

Bolsonaro offered 400 reais for truckers that were hard hit by diesel’s rising price and threatened to stop trucks like the one that shut down Minas Gerais gas stations on Friday.

According to someone familiar with the matter, the proposal was not thoroughly vetted and the Treasury officials were sent to the exits before Congress lifted the spending limit.

Four officials did not comment further about their motivations for leaving.

Many economists are predicting an aggressive central bank interest rate rise next week because of fiscal risk. It raised rates by 1 percentage point in the last month to counter double-digit inflation.

Credit Suisse (SIX.) Economists now predict an interest rate rise of 125 base points. UBS analysts, however, forecast a rise in rates of 150 basis points.

($1 = 5.6910 reais)