Lula’s team seeks to recover investment grade by the end of 2026

While there are several alternatives on the table to replace Brazil’s main fiscal rule, a cap that limits public spending growth to the rate of inflation, the new Treasury chief said the main condition for the future fiscal anchor is that it open budget space for social investment while generating primary fiscal surpluses (which do not take interest payments into account).

“Reforms play an important role in bringing Brazil back to investment grade”said Ceron in an interview with BloombergNews and a local media outlet. “We are not that far from investment grade.”

Brazil lost its investment grade status, a seal granted by rating firms that certify a low probability of default, when Fitch Ratings downgraded the country to speculative grade in December 2015, three months after a similar move S&P Global.

The decisions came after the president Dilma Rousseff he relaxed the goals of fiscal savings in the midst of an economic crisis and the risk of his impeachment, which occurred the following year.

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But Brazil has now taken a different direction, says Ceron.

Although Lula will keep his promise to boost social spending, the current spending that is required for the normal functioning of the Government will be reviewed “more rigorous” and public revenue should rise to 19% of gross domestic product (GDP), roughly the same level it was at in 2022 before a series of tax breaks granted by the Jair Bolsonaro Administration.

dividends

An income tax reform is another way to give credibility to Brazil’s finances without ignoring social demands, Ceron said. Discussion of that reform, which Haddad plans to bring to lawmakers in the second half of the year, could include the dividend tax, a proposal that the previous government tried but failed to pass in Congress.

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ESG Bonds

The secretary also said that the Treasury is moving forward with a plan to issue sovereign bonds linked to ESG (environmental, social and corporate governance) projects.

“We are closely watching the ESG-linked issuance and evaluating that possibility,” Ceron said, adding that the plan is for the government to issue such bonds, helping private companies in sectors such as energy to raise funds in international markets.

In the domestic debt market, the Treasury’s strategy remains to lengthen maturities as a way to reduce risk, he said. Extending the maturity of public debt also reduces the impact of changes in the central bank’s reference interest rate on the cost of public debt.

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