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This ‘grim’ scenario, which forms a consensus among market analysts and economists, has already been classified as a ‘fiscal bomb’, whose ‘detonation’ is expected to occur early in the next presidential term, next year, regardless of who occupies the Planalto.
High debt requires deep structural adjustments
As the ‘backdrop’ of such an unpredictable situation, there is an urgent need for deep structural adjustments, given the high level of public debt and the rigid Union budget due to mandatory expenses.
In this perverse trend, it is estimated that the Federal Public Debt (DPF) will close December 2026 between R$ 9.3 trillion and R$ 10.3 trillion (80% of a GDP amount estimated at R$ 13 trillion), as predicted by the Annual Financing Plan (PAF), released by the National Treasury.
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FIRJAN’s mega plan of R$ 526.3 billion for Rio de Janeiro aims to revive Brazil’s largest industry, with two-thirds of the investments going to oil and gas.
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China signals an increase in beef imports, Brazil has already consumed 70% of the 1.106 million ton quota and seeks to renegotiate the tariff that jumps from 12% to 55%, while demand from the US also skyrockets.
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Food inflation rose 302% in 20 years in Brazil, but the supermarket changed: purchasing power yielded 87% more mortadella and 31% less fruit, and ultra-processed foods took over the cart.
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Petrobras sells the first batch of 3,800 m³ of aviation fuel made with certified soy, capable of reducing emissions by up to 70%, in an unprecedented project that anticipates the aviation sector’s requirements expected for 2027.
Yellow light for the continuation of fiscal imbalance
From the electoral perspective, the increase in Lula’s lead over Flávio in voting intention polls has turned on the market’s yellow light, as they understand that the potential victory of the PT candidate in the upcoming October election would indicate the perpetuation of fiscal imbalance.
Looking at the medium term, Warren Investimentos’ chief economist, Felipe Salto, emphasizes that the next ruler, regardless of party affiliation, will have to face a ‘very difficult fiscal situation’ starting in 2027.
Exit from the crossroads demands a series of measures
As a way out of the current fiscal crossroads resulting from the current wasteful left-wing management – marked by a nominal deficit of 9% of GDP and a primary deficit of 0.4% of GDP – Salto highlights the following measures:
- The amount allocated to the Fund for the Maintenance and Development of Basic Education (Fundeb) increased from R$ 20 billion to R$ 65 billion;
- Super salaries in the public service would have a cut of up to R$ 11 billion in perks;
- Parliamentary amendments, reduced by half;
- Parafiscal expenses;
- Salary bonus policy;
- Deindexation of Social Security and the Continuous Cash Benefit (BPC) to the minimum wage;
- Unlinking the Health and Education floors from revenue indicators.
When considering the adoption of this set of actions as ‘vital’, within a serious commitment to fiscal adjustment by the next leader, the chief economist of Warren believes it is feasible to move from a primary deficit of 0.4% of GDP to a surplus of 2% of GDP in two years, which “would allow for a reduction in both the Selic rate and the interest rate curve.”
Primary Surplus Will Allow Debt Stabilization
If the mentioned surplus is achieved, Salto assesses that it is possible to stabilize the debt at the level of 85% of GDP before its effective decline. Didactically, the Warren executive points out that, “due to having a debt/GDP ratio much higher than other emerging markets, Brazil suffers a risk premium on the cost of Brazilian public debt.”
In contrast, with a positive primary result, with a surplus of 0.2% of GDP next year, and 0.7% of GDP in 2028, the public debt would reach 83.4% of GDP and 87% of GDP, respectively.
Country’s Solvency Risk is Averted, For Now
By dispelling the expectation that Brazil could ‘break’, Salto argues that the country shows ‘external solvency’, in addition to confidence in the currency and a poor fiscal situation, but not ‘disastrous’.
He explains that it is not “a scenario of insolvency, but a situation that has persisted for a long time, since 2014, as a reflection of the policy adopted between 2008 and 2014, the so-called ‘creative accounting’, which dismantled the primary result system from within.”
Emphasizing that the current situation is different from 12 years ago, Salto notes that the primary deficit is known (between 0.4% and 0.5% of GDP per year), and parafiscal expenses are comparatively lower. He also adds that there is a balance in external accounts, since, even with the worsening current deficit (2.5% of GDP), the Direct Investment in the Country (IDP) corresponds to 3.3% of GDP in the accumulated 12 months.
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