IMF Predicts Significant Increase in Brazil’s Public Debt-to-GDP Ratio

The International Monetary Fund (IMF) has issued a concerning forecast regarding Brazil’s public finances amid fears of a fiscal crisis.

The IMF anticipates that Brazil’s public debt as a percentage of its Gross Domestic Product (GDP) will rise by over 10 percentage points during President Lula’s third term.

The organization remains skeptical about the government’s ability to achieve fiscal stability, projecting a primary surplus only by 2027.

According to the IMF, Brazil’s public debt-to-GDP ratio is expected to increase from 83.9% at the end of 2022, which marked the final year of former President Jair Bolsonaro’s administration.

By 2026, the ratio is projected to rise to 94.7%, coinciding with the end of President Luiz Inácio Lula da Silva’s current term.

This projected increase of 10.8 percentage points is significant for investors considering resource allocation in the country during Lula’s third presidency.

This scenario represents Brazil’s most challenging fiscal situation since 2020 when pandemic-related expenditures severely impacted public finances.

The new projections are part of the Fiscal Monitor report released on Wednesday, October 23, coinciding with the IMF’s annual meetings in Washington, D.C.

IMF’s Pessimistic Outlook for Brazil’s Fiscal Health

The IMF predicts a gradual fiscal deterioration in Brazil. It estimates that the public debt-to-GDP ratio will reach 87.6% this year, worse than the previous forecast of 86.7% made in April. Next year, the ratio is expected to rise to 92.0%.

As Brazil continues to accumulate debt, its fiscal position will remain weaker than that of other emerging markets. The IMF estimates that these emerging markets will average a fiscal position of 70.8% this year and 75.0% by 2026.

For 2024, Brazil’s debt-to-GDP ratio is expected to be surpassed only by countries like China, Egypt, Ukraine, Bahrain, and Argentina. Gross public debt as a proportion of GDP is a crucial solvency indicator closely monitored by credit rating agencies.

The IMF calculates this indicator differently by including Treasury bonds held by the Central Bank, which are not counted by the Brazilian government due to its use of a measure comparable across countries.

The IMF has slightly improved its outlook for Brazil’s fiscal targets in 2024. It now expects a primary deficit of 0.5% of GDP this year, down from the previous estimate of 0.6% in April.

Brazil’s Fiscal Challenges

However, for 2025, the IMF has more than doubled its primary deficit projection. It now estimates a primary deficit of 0.7% of GDP, up from an earlier estimate of 0.3%.

Under this scenario, Brazil is not expected to achieve a budget surplus during Lula’s current term. In 2026, the country’s primary deficit is projected at 0.6%.

A shift towards a surplus is anticipated only from 2027 onwards, with an expected primary surplus of 0.1% of GDP. These pessimistic projections come as Brazil’s economic team works on a spending cut package.

The announcement is planned for after Finance Minister Fernando Haddad returns from Washington. Haddad is attending the IMF annual meetings and G20-related events there as Brazil holds the G20 presidency this year.

When asked about these measures, Haddad refrained from providing specifics: “I have meetings scheduled with other ministries and the President. We have a path to follow,” he told reporters in Washington on Tuesday, October 22.

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