Brazil’s national debt jumps to record mark, deficits shoot up

Brazilian public sector debt and deficit figures for March released recently gave a glimpse of the fiscal strain to come from the coronavirus crisis, as the national debt surged toward the highest on record and deficits widened sharply.

The public sector primary deficit in March was the widest in 18 months, the nominal deficit was the fourth largest in two decades, and the national debt posted its biggest month-on-month leap in at least 14 years.

With the lockdowns and sudden stop to large parts of the economy triggering a crisis-fighting spending splurge from the government and a slump in tax revenues, analysts say it is not a question of whether deficits and debt rises, but by how much.

“We expect the fiscal and public debt picture to deteriorate significantly in coming months,” Alberto Ramos, head of Latin American research at Goldman Sachs in New York, wrote in a note.

“We now expect the consolidated public sector to record a primary fiscal deficit of at least 8% of GDP (likely higher), leading to a sharp increase of gross public debt to close to 90% of GDP,” he said.

The overall public sector posted a primary budget deficit excluding interest payments of 23.7 billion reais ($4.3 billion) in March, the central bank said, slightly less than the 24.8 billion reais deficit forecast in a Reuters poll.

That was the widest primary deficit since September 2018. As a share of gross domestic product over the 12 months to March the primary deficit widened to 0.9%.

Treasury Secretary Mansueto Almeida said this week that the primary deficit this year will likely balloon to 600 billion reais, or 8% of GDP.

The nominal deficit swelled to 79.7 billion reais in March, the central bank said. According to their historical data, that was the fourth largest in 19 years, only behind three months during the 2015-16 recession.

Gross national debt rose to 5.76 trillion reais, or 78.4% of GDP, driven by increased gross debt issuance, nominal interest rates and the impact of a weaker currency, the central bank said.

The 1.7-percentage-point increase from February marked the biggest rise since at least 2006, according to Refinitiv data, and takes the national debt back up toward last year’s all-time high of 79% of GDP.

Net debt, however, fell to 51.1% of GDP, the lowest since September 2018, in large part due to the real’s 15.6% depreciation against the dollar in the month, the central bank said.

Public sector workers in Brazil whose salaries will be frozen until the end of 2021 to help fund a federal aid package for cash-strapped states and municipalities will only be making a “small” sacrifice, Treasury Secretary Mansueto Almeida said.

His comments came in an online discussion hosted by media outlet Folha de S. Paulo, on the same day Senate President Davi Alcolumbre presented a draft bill to deliver 60 billion reais ($11 billion) of aid to local authorities.

Almeida said the aid package was “good and necessary” for local authorities whose tax revenues will slump due to the coronavirus crisis, although its final size has yet to be determined by votes in the Senate and lower house of Congress.

Originally, the Economy Ministry proposed a package worth 40 billion reais. But on Wednesday Economy Minister Paulo Guedes said central government aid for local authorities could reach 130 billion reais, although many of those measures have already been announced.

Of the 60 billion reais outlined in the draft bill on Thursday, 10 billion is for health spending and the fight against coronavirus.

Almeida repeated his pledge that emergency spending will be confined to this year, noting the constitution and government fiscal rules mean spending increases cannot spill into 2021.

The government must show investors it remains committed to fiscal discipline over the long term, otherwise it could face problems financing its debt even in the short term.

If the crisis persist, however, the government will have to consider which emergency measures can be extended and by how much, Almeida said.

On Thursday, Guedes said a government program, in conjunction with the private sector, to reduce workers’ salaries and hours had saved 4.3 million jobs so far, with the number likely rising to 5 million eventually.

Meanwhile, global automakers seeking emergency financing for their plants in Brazil have reached an impasse with several state and private banks, after the lenders demanded collateral from the parent companies, two sources told Reuters.

The sources said the carmakers have balked at the request, delaying any decision on the billions of reais sought by automakers.

Reuters