Brazil in Worst Position for Debt Rollover, Says IIF

RIO DE JANEIRO, BRAZIL – Brazil began 2021 with the most need to refinance its public debt among all emerging countries.

With maturity substantially reduced in 2020, debt rollover this year by issuing new bonds represents 18.5% of GDP, the highest level in the Treasury’s records, which began in 2005.

The amount is equivalent to approximately R$1.4 trillion (US$259 billion), which will need to be raised with the sale of bonds on the market.

According to a new report by the Institute of International Finance (IIF), which comprises 450 banks and financial institutions in 40 countries, the Brazilian situation is challenging when compared to other emerging countries. “Overall, we observe the highest refinancing risk in Brazil,” says the IIF report, for which the country “deserves attention”.

The IIF considers the difficult scenario Brazil is facing to cut spending (and limit debt growth) and its record debt maturities this year a “risky combination”.

“The fiscal situation calls for a large volume of debt issues given the shortened maturities and high amortizations, particularly around April,” says Martín Castellano, head of the IIF’s Research Department for Latin America.

“The risk is for the country to undergo an adjustment in potentially more difficult market conditions in the future.”

In recent analyses, the IIF suggested that very few countries are able to sharply reduce spending after a significant increase.

The organization also believes it will be difficult for Brazil not to find itself forced to run up more debt in order to reinstate some kind of emergency aid to the poorest, due to the surge in the pandemic.

“Compliance with the fiscal rule [the spending cap, which limits the increase in spending to inflation over the preceding 12 months] demands the reversal of emergency spending, something we are not sure is feasible,” says the IIF.

With the end of the emergency aid in December, 2021 started with a hike in the extreme poverty rate in Brazil, with 12.8% of the population living on less than R$246 per month (R$8.20 per day).

Among the options under consideration by the Ministry of Economy would be to condition the reinstatement of emergency aid (or a boosted Bolsa Família) to the approval in Congress of some measure of relevant fiscal impact.

According to MB Associados’ chief economist Sérgio Vale, the most likely course of action would be for the Jair Bolsonaro government and the Chamber of Deputies – now under the control of the so-called Centrão party bloc – to create a new tax such as the CPMF (tax over financial transactions) – as advocated by Economy Minister Paulo Guedes – rather than seek a structural adjustment in spending.

It is worthy of note that while higher spending in 2020 should not be repeated this year (which may reduce pressure on refinancing), Brazil’s high level of indebtedness (equivalent to nearly 90% of GDP, the highest among emerging countries) will at some point require a structural adjustment in spending to reduce public debt and extend its term.

Since the Bolsonaro government’s inception, as a result of higher spending, particularly in the pandemic, the average maturity of Treasury bonds has dropped significantly, from 4.8 to 3.4 years.

Maturities in 12 months have more than doubled, from approximately R$600 billion to almost R$1.4 trillion.

In January 2019, 15% of public debt matured in 12 months. Now, it reaches 27.6% – the highest since 2007.

Indications that the Central Bank may soon initiate a cycle of rising interest rates exacerbate the scenario – higher rates mean higher debt growth.

Given the shortening of its term and the increase in indebtedness, approximately 55% of total maturities in 12 months will be impacted by a rise in interest rates.