Brazil’s government has flagged rising risks tied to public debt renegotiation, with a record level projected for 2025 as a larger portion of debt remains exposed to short-term interest rates.
In a fiscal risks annex to the 2026 budget guidelines bill submitted to Congress on Tuesday, the Treasury estimated that 62.1% of federal public debt will be sensitive to short-term rate changes this year, the highest level since the data series began in 2008.
The government emphasized the need for fiscal consolidation to improve debt sustainability.
Unprecedented short-term debt sensitivity
The above figure includes debt linked to the Selic policy rate and securities maturing within 12 months, both of which face refinancing costs directly influenced by benchmark rates.
The Treasury now projects this share to remain elevated, reaching 58.9% in 2028, a sharp increase from a previous estimate of 51.2%, underscoring the country’s vulnerability to rate-driven fiscal pressures.
The situation raises concerns because the refinancing prices of this debt are directly determined by the Brazilian central bank’s monetary policies.
Historically, Brazil has financed a large share of its debt with floating-rate bonds, which are especially tempting to investors during times of market volatility.
However, the current economic context, marked by rising mandatory spending, has forced the Treasury to rely significantly on these instruments, resulting in the country’s worst debt composition in 20 years.
Implications of Central Bank policies for fiscal stability
Brazil’s debt is becoming increasingly sensitive as the central bank tightens monetary measures to combat persistent inflation.
The benchmark interest rate has risen by 375 basis points since September, to 14.25%, with more hikes expected in May.
Such steps demonstrate the central bank’s commitment to price stability while also contributing to the government’s fiscal issues.
Furthermore, the government’s acknowledgement that the rise in floating-rate debt is due to uncertainties about fiscal consolidation demonstrates the complicated relationship between monetary policy and public finance.
Without a clear strategy for long-term stability, the Treasury may struggle to issue long-term fixed-rate or inflation-linked bonds, exacerbating Brazil’s debt problems.
Calls for fiscal consolidation: a way forward?
In response to these rising fiscal risks, the Brazilian government has proposed a primary surplus of 0.25% of GDP for the following year—the first surplus objective set by President Luiz Inacio Lula da Silva during his current tenure.
This proposal seeks to create a more favourable environment for fiscal consolidation, allowing for lower-cost debt issuance and maybe reversing the current trajectory of market risk.
However, financial specialists, including those from Itau Bank, remain doubtful of the proposal’s adequacy.
The bank contends that the current rate of fiscal adjustment is insufficient to stabilise public debt, forecasting a probable deficit of 0.8% of GDP instead.
The disparity in fiscal outlooks between government estimates and market expectations exposes Brazil’s shaky national finances.
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