Brazil reduces debt to 80% in 2021 and records its lowest deficit since 2013

RIO DE JANEIRO, BRAZIL – Latin America’s largest economy tightened its belt in 2021 in an effort to mitigate the fiscal crisis it is experiencing, after massive expenditures in 2020 due to the coronavirus pandemic, which this year is again accelerating due to the Omicron variant.

The sharp 9.2 point reduction in the nominal public deficit, which includes debt interest payments, was driven by the good performance of the consolidated public sector, which includes the federal, regional and municipal governments, and a number of state-owned companies.

In this context, the consolidated public sector accounts recorded a surplus of R$64.7 (US$12) billion in 2021, equivalent to 0.75% of GDP and marking the first positive figure since 2013.

This also led Brazil to record its lowest nominal fiscal deficit relative to GDP since 2013, when it reached 2.96%. However, consolidated public sector nominal interest grew from R$312 billion (or 4.2% of GDP) in 2020 to almost R$450 billion (5.2% of GDP) last year.

On the other hand, Brazil’s gross state debt also followed a downward trend in 2021 after reaching record levels above 90% of GDP in parts of 2020. According to the Central Bank, Brazilian public debt closed last December at R$7 trillion, equivalent to 80.3% of GDP, compared to 88.6% of GDP in December 2020.

The issuing agency said that this public debt reduction is mainly the result of the growth of nominal GDP, liquid debt repayments and the incorporation of interest. According to the latest financial market forecast, Brazil’s GDP grew by 4.50% in 2021, after plummeting 3.9% in 2020 as a result of the impact of Covid-19, which has killed almost 627,000 people in the country.

The Brazilian financial market also experienced serious turbulence in the final stretch of last year due to the fiscal uncertainty generated by the government of President Jair Bolsonaro, who decided to increase social spending in 2022, the year he will run for reelection, by relaxing his commitments to fiscal responsibility.

Specifically, the Executive, with the endorsement of Congress, altered the spending cap, in force since 2017, and deferred the payment of a number of court-ordered federal debts to make room in the budgets and launch a subsidy program for the country’s poorest families.

In fact, for this year, in which there will be presidential, regional and legislative elections, financial analysts are more pessimistic and project economic growth in Brazil for 2022 of just 0.3%. Some financial institutions, such as Itaú, Brazil’s largest private bank, forecast that the country will close the year in recession.

This slowdown is credited to high inflation, which closed 2021 in double digits, the continued rise in official interest rates, high unemployment (11.6%) and political uncertainty due to the elections.

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