SÃO PAULO—Brazil’s stock market has lost about $70 billion in value this week after President Jair Bolsonaro moved to fund new handouts for the poor by altering a constitutional spending cap, a cornerstone of the country’s fiscal policy.

Brazil’s currency, the real, weakened to a seven-month low Friday, trading at 5.7 to the dollar, while the country’s stock market has lost about 10% this week, falling to the lowest level in almost a year.

The...

SÃO PAULO—Brazil’s stock market has lost about $70 billion in value this week after President Jair Bolsonaro moved to fund new handouts for the poor by altering a constitutional spending cap, a cornerstone of the country’s fiscal policy.

Brazil’s currency, the real, weakened to a seven-month low Friday, trading at 5.7 to the dollar, while the country’s stock market has lost about 10% this week, falling to the lowest level in almost a year.

The market downturn reflects growing anxiety over the economic policies of the populist leader. When Mr. Bolsonaro took office in 2019, the former army captain promised an avalanche of free-market policies, appointing Paulo Guedes —a University of Chicago-trained investment banker—as finance minister.

But Covid-19 turned those plans upside down. Brazil has instead embarked on one of the most generous welfare programs during the pandemic among any developing nation, handing out as much as $10 billion a month in emergency payouts.

Now, Mr. Bolsonaro is looking for a way to fund a new $70 monthly permanent stipend for the poor that political scientists say is also an attempt to boost his dwindling approval rating ahead of next year’s presidential race.

Mr. Guedes said Wednesday that he was seeking a waiver from Brazil’s constitutional spending cap to fund the payouts. Four high-level officials of Brazil’s finance ministry quit Thursday, reportedly in protest.

Brazil passed the constitutional amendment in 2016, which effectively froze federal funding for the next two decades in line with inflation—a crucial fiscal anchor for a country where politicians have often spent their way out of political crises only to land the country in repeated financial and economic blow ups.

“We’re definitely in a very dangerous situation,” said Pedro Paulo Silveira, economist and director at the São Paulo-based Nova Futura asset-management company, adding that next year’s election could increase volatility further and scare away more investors.

It is a big disappointment, he said, after the free-market promises offered by Mr. Bolsonaro’s administration at the beginning of his mandate, including a series of privatizations and reforms that haven’t happened. “[Mr. Guedes] had planned to leave his mark on Brazilian history as a great liberal reformist, but he didn’t manage that.”

Mr. Guedes canceled his appearance at an event in São Paulo on Friday, as Brazil’s Globo news website reported that allies of the president had already begun sounding out names for a possible replacement. Mr. Bolsonaro has vowed to stand by Mr. Guedes.

Brazil’s total debt stood at about 83% of gross domestic product as of August. Economists predict that level to rise as the country faces a scenario of possible stagflation—near-zero growth over the coming year and high inflation, pushing up interest rates and the cost of servicing that debt.

Mr. Bolsonaro criticized the market Thursday for being “jittery.” “If you explode Brazil’s economy, then you’ll be hurt too,” he said, speaking during a Facebook broadcast. He also promised financial aid of $70 a month to 750,000 truckers to compensate for higher fuel prices.

The Bolsonaro administration had been banking on changes to Brazil’s tax code, including proposals to tax dividends, to fund its new welfare program. But a damning congressional inquiry into Mr. Bolsonaro’s handling of the pandemic, which came to an end this week, has raised opposition to the president in the senate, stalling the bill.

Short of other options, the government this week embarked on a new constitutional amendment to free up more than $15 billion. The amendment, which was approved by a congressional committee late Thursday, changes the way the spending cap is pegged to inflation and allows the government to put off paying some of its judicial bonds. It must still be approved by the wider lower house of congress, which is controlled by supporters of the president.

These maneuvers mean the government won’t technically break the spending cap, economists said, but these efforts have raised doubts in the market over the government’s commitment to improving the country’s fiscal health.

“We care not about the letter, but rather the spirit of the law, and it is clear that the fiscal regime created in 2016 is simply no more,” said Alexandre Schwartsman, a Brazilian economist and former central-bank director.

—Jeffrey T. Lewis contributed to this article.

Write to Samantha Pearson at samantha.pearson@wsj.com and Luciana Magalhaes at Luciana.Magalhaes@wsj.com