Brazil: Lula da Silva’s election has potential impact of US$15 billion on debt

By Paulo Silva Pinto

The election of Luiz Inácio Lula da Silva (PT, progressive-globalist) will have a potential impact of R$80 (US$15) billion on the country’s public debt if everything had to be negotiated right away.

The account is from economists linked to the current government based on long-term interest rates, which have risen since the victory of the PT.

The country’s gross debt reached R$7.3 trillion in October, according to official BC (Central Bank) data.

The value corresponds to 76.8% of GDP (Gross Domestic Product).

Titles are already priced. However, when redeeming and re-issuing, you will have to pay higher fees to creditors.

There was an increase of 2.01 percentage points to 2.21 p.p. depending on the term.

Credit makes it more expensive for the government and companies, who will have to pay more for new loans or renew existing ones. Therefore, they tend to invest less.

Future interest rates in Brazil have risen since Oct. 28, the business day before the 2022 elections.

For example, contracts maturing in January 2025 rose from 11.82% to 13.92%, up 2.1 points.

Contracts maturing in January 2027 rose from 11.65% to 13.60%, up 1.85 percentage points.

In practice, the increase in future interest rates makes public debt more expensive in the long term.

The high rates are due to some factors, but the main one is the PEC (Proposed Amendment to the Constitution) that breaks the ceiling.

The government supports the text by allowing R$200 billion from the spending cap rule. Economic agents estimate that there will be an imbalance in public accounts, which makes the country a place of greater risk.

45 days after the election, Lula da Silva has already made future debt payments more expensive, according to economists’ calculations.

The higher the extra-ceiling expenses, the higher the future debt payment. Fernando Haddad, the future finance minister appointed by Lula da Silva, criticized the spending cap.

The speech also makes future interest rates more expensive. Expectations will continue to deteriorate in the face of prospects for increased public spending.

What the market does is simply price valuations. By the way, this does not only happen in Brazil: the assets are traded globally.

Futures interest contracts fell in the same period of 2018 after the victory of Jair Bolsonaro (PL) at the polls.

Contracts expired in January 2021 fell from 8.12% to 7.40% per annum. From January 2023, from 9.21% to 8.61%. And from January 2025, from 9.73% to 9.21%.

Lula da Silva rightly says that there is optimism among world political actors because he beat Bolsonaro.

But it’s not exactly what you see among financial traders. Of course, there is room to change expectations.

But the future government needs to stop betting on voluntarism and magical solutions.

An expensive state will mean lower economic growth.

With information from Poder360