Brazilian central bank figures released on Monday show a slight rise in the public sector gross debt to 76.1 per cent of gross domestic product (GDP) in May versus 76.0 per cent in April.
The modest rise highlights continued strain on public finances against a backdrop of elevated interest rates and an increasing debt burden.
During the month, the composition of the debt has been mainly due to interest payments, said the central bank, even as the government recorded a primary fiscal balance that was “better” than market forecasts.
Rising interest costs drive debt growth
Latin America’s largest economy paid 92.145 billion reais ($16.82 billion) in nominal interest in May, a 23.9% rise over the same month last year.
The increase reflects both the country’s high benchmark interest rate and the growing magnitude of its public debt.
The central bank’s continued monetary tightening campaign has accelerated the trend of rising interest payments. To control inflation, officials boosted the benchmark Selic rate by 25 basis points to 15% earlier this month.
This new decision brings the total number of rate increases since September to 450 basis points.
The primary deficit is narrower than expected
Even with an increasingly expensive debt burden, Brazil ended up with a smaller-than-expected primary budget deficit, with analysts surprised by the performance.
In May, the primary deficit in the public sector came at 33.74 billion reais, much less than the 42.7 billion reais shortfall forecasted by a Reuters poll of economists.
The primary deficit (the deficit excluding interest payments) is a leading indicator of the fiscal stance of the government budget.
A smaller gap indicates either a slight improvement in fiscal discipline or better revenue-gathering, but such advances were not significant enough to fully counter the pressure from rising interest outlays.
Twelve-month figures reveal structural imbalances
On a rolling 12-month basis, the public sector had a tiny primary surplus of 0.2% of GDP. However, interest payments during the same time totalled 7.77% of GDP, bringing the overall nominal deficit to 7.58% of GDP.
These numbers demonstrate the widening structural disparity between Brazil’s revenue and debt obligations.
While the government has maintained a primary surplus for the past year, the high level of interest payments has resulted in a continuous nominal deficit and an increasing debt-to-GDP ratio.
Fiscal outlook hinges on inflation and rates
New data reflect the fiscal challenges that Brazil faces while in a tightening monetary policy cycle.
Governments are under constant pressure on the broader fiscal outlook as the cost of servicing public debt continues to rise, and interest rates remain at historically higher levels to tackle inflation.
Public debt dynamics are still vulnerable to future choices over inflation control as monetary policy remains restrictive stance and the benchmark rate is currently at a multi-year high.
The objective of the government to reduce primary deficits has not been enough to offset this trend, driven by higher interest payments, discouraging the progress towards a stabilisation of the country’s debt dynamics, according to the May data.
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