When Dilma Rousseff attended the 2016 opening session of Brazil’s congress last week, she appealed to lawmakers to approve tax increases to tackle a widening gap in the country’s public finances.

Most critically, the president called for the reintroduction of a tax on financial transactions, known as the CPMF,

But with Brazil reporting a budget deficit last year that was the biggest among emerging economies except for Saudi Arabia at over 10 per cent, unpopular measures are needed to save the country from a deepening fiscal hole, analysts say.

Indeed, some economists argue that given Brazil’s growing political and budget crises, its currency, the real, should be trading at closer to R$5 against the dollar than today’s level of around R$4. Only intervention by the central bank with its large reserves and Brazil’s high interest rates are keeping hedge funds at bay, they say.

“Most of us think that if it were just based on fundamentals, the real should be closer to R$5 to the dollar not R$4,” said a senior banker with a foreign institution in São Paulo.

Ms Rousseff made a rare appearance in congress because she will need all the support she can get in 2016. Not only is the economy heading into its worst recession in more than a century but lawmakers will resume an impeachment process against her after the annual carnival festivities.

A central bank survey of economists shows most predicting gross domestic product will contract by more than 3 per cent this year, compounding what is expected to have been a more than 3 per cent fall in 2015. They are also forecasting inflation of 7.3 per cent, above the central bank’s target range of 4.5 per cent plus or minus 2 percentage points and carrying on from last year’s blowout rise in prices of 10.7 per cent.

The survey also shows economists predicting the real will end the year at R$4.35 to the dollar compared with about R$3.90 on Wednesday.

However, even though a rate of R$4.35 would be a record nominal low for the currency, it could have much further to fall, economists say. In spite of the much more negative economic situation today, Brazil’s currency remains stronger against the dollar in real terms than when it last hit record lows in 2002. At that time, the currency was struck by pessimism over the election of a leftwing firebrand president, Luiz Inácio Lula da Silva, who later turned out to be more market-friendly than expected.

On a real effective exchange rate basis, the real today is trading at about 15-25 per cent below its historical average while in 2002 it fell as much as 50 per cent below its average. Indeed, the currency’s “equilibrium” — the level at which it would represent fair value in real terms — would be R$5.45 if it were allowed to float without intervention, said Marcos Casarin, economist with Oxford Economics.

“This [R$5.45 to the dollar] is where the model says OK now your external adjustment is done and now this rate will ensure you have some capacity for your export industry to be competitive in external markets,” Mr Casarin said.

This fact has not been lost on hedge fund managers. Just before the Christmas break, Brazilian hedge fund, Verde Asset Management, led by Luis Stulhberger, known for his long history of market outperformance, said in a report it saw the currency as overvalued.

“The time will come to have much higher exposure in US dollars [versus the real],” Verde said. “We remain very attentive.”

The obstacle facing hedge funds is the prospect of central bank intervention to defend the currency. Brazil has one of the largest foreign exchange reserves in the world at about $369bn. Betting against the real by going short is also expensive given Brazil’s high interest rates, with the central bank’s benchmark Selic rate at 14.25 per cent.

“I think it [the real] will be held back by central bank intervention and also by those fat interest rates they offer, which discourage shorting of the real,” said Mr Casarin of Oxford Economics.

Another factor potentially helping the real is a collapse in trade, with imports contracting faster than exports in recent months. This has generated a positive trade balance — a factor that could curb depreciation of the Brazilian currency, Nomura said in a report.

However, most analysts say that even if the real can withstand Brazil’s internal problems, it is extremely vulnerable to an external event, such as a significant devaluation of the renminbi. China is one of Brazil’s most important trading partners. Such a shock could open the currency up for attack.

“There are a lot of mines along the way, external and internal, so the real, as much as it has moved down, probably hasn’t seen its bottom yet,” said Jorge Mariscal, emerging markets chief investment officer with UBS Wealth Management.