Bolsonaro’s fiscal rule plan raises cost of Brazilian bonds

The President’s Efforts Jair Bolsonaro to break the spending limit of Brazil The government’s borrowing costs are already increasing and next year could end up costing up to US $ 74.00 million reais (US $ 13.3 billion) in additional payments on local bonds.

Higher benchmark rates, as the central bank raises the Selic in a bid to control inflation, and rising risk premiums amid doubts about fiscal stability mean the costs of existing debt could rise at 64,000 million reais, according to projections by Adriana Dupita, an analyst at Bloomberg Economics who covers Brazil from São Paulo. The new bonds issued to pay for the additional expense could add an additional 10 billion reais in debt expenses, Dupita estimates.

Congress is acting to approve changes to the spending cap the country has had since 2016 to accommodate Bolsonaro’s new social program, which increases cash transfers to those most in need. The plan, which comes before the generally unpopular president seeks re-election next year, worries investors convinced the rule had helped keep spending at a sustainable level. The proposed change will increase interest rates on new debt by 0.9 percentage points in 2022, as investors demand a higher return on loans from the government, says Dupita.

Government officials have already seen an increase in the premium that investors demand on Brazilian bonds and the average cost of the securities issued in the last 12 months has increased 50 basis points, or half a percentage point, in September compared to the month. previous. This was a direct result of investors’ concerns about Brazil’s public finances, Public Debt Operations coordinator Luis Felipe Vital told reporters last week.

The increase in interest rates it can already be seen in the Brazilian fixed rate bond market. Yields on government notes due in January 2024 rose to 12.3% on Friday, from around 9.4% in early September.

Latin America’s largest economy has been under investor scrutiny since the start of the pandemic when the government increased fiscal stimulus to support the economy. Last year, the government’s primary spending reached a record 26.1% of gross domestic product. While that proportion was forecast to fall to 17.5% next year, exceeding the fiscal limit could limit the decline to 18.4%, according to the economy ministry.

Debt was already getting more expensive even without the new fiscal stimulus. Brazil’s central bank has been among the most aggressive in the world in its quest to curb inflation, and since March it has raised rates by 5.25 percentage points to 7.75%. Rates are expected to end the year at 9.25%.

Analysts at JPMorgan Chase & Co. forecast that Brazil’s debt will reach 81.3% of GDP this year and 87.6% in 2022. Citigroup Inc. recently warned that it could increase estimates for Brazil’s credit burden if the new social program boosts the expense.

“Recent budget developments have significantly eroded the credibility and effectiveness of the main fiscal anchor, the constitutional spending ceiling,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., wrote in a note.