Brazil’s public debt is projected to increase by up to 16% this year, with floating-rate bonds possibly making up over half of the total debt. The Treasury forecasts debt levels between 8.1 trillion to 8.5 trillion reais ($1.47 trillion) by 2025. Recent interest rate hikes pose challenges for debt servicing, emphasizing the need for strategic adjustments in public debt management.
Brazil’s Treasury forecasts a significant rise in federal public debt, expected to increase up to 16% this year, with bonds linked to the benchmark interest rate possibly making up more than half of total debt. This situation puts pressure on the nation as it navigates the challenges of servicing its debts amid aggressive inflation-controlling measures by the central bank.
The projected public debt for 2025 ranges from 8.1 trillion to 8.5 trillion reais ($1.47 trillion), a notable increase from December’s figure of 7.316 trillion reais. In its annual financing plan, the Treasury continues to advocate for issuing conventional and sustainable bonds to enhance the Brazilian sovereign yield curve and may also consider external liability management operations to optimize this curve.
This year, the Treasury estimates that floating-rate bonds will comprise 48% to 52% of total debt, following a rise to 46.3% in 2024. These bonds, known as LFTs, reached their highest proportion in two decades last year, influenced by volatility and increasing concerns about Brazil’s overall debt levels.
Treasury Secretary Rogerio Ceron emphasized that raising the share of floating-rate bonds is aligned with market needs, stating, “There is no point in working against market demand.” Such bonds may attract investors during volatile conditions but expose the country to increased servicing costs as interest rates rise.
Just recently, Brazil’s central bank raised interest rates by 100 basis points to 13.25%, with indications for another rise to tackle inflation, which is spiking due to strong economic activity and currency depreciation. Each interest rate hike directly affects servicing costs related to Brazil’s substantial debt load, currently at 76.1% of GDP.
The Treasury aims to reduce the proportion of floating-rate bonds to 23% by 2035. However, Daniel Leal, the deputy secretary for public debt, noted that achieving this target within a decade might be unrealistic, stating, “This may take a little longer.” He also affirmed that the higher share of these bonds does not hinder monetary policy effectiveness.
Leal remarked that the Treasury began the year with a balanced approach to debt management, highlighting the success of January auctions in terms of raised volumes compared to previous periods of lower activity.
Brazil is currently experiencing challenges related to its public debt management amidst rising inflation rates. The increase in federal public debt is attributed to expanding reliance on bonds linked to the central bank’s Selic interest rate, which are sensitive to shifts in inflation control measures. As market conditions fluctuate, understanding the implications of debt service requirements and the structural changes in public borrowing becomes essential for evaluating Brazil’s economic stability.
Brazil faces an ongoing challenge balancing newly projected public debt and market expectations amid rising interest rates. The Treasury’s strategy centers on the issuance of bonds reflective of market demand while attempting to manage the debt structure for long-term sustainability. Future actions will need to address the pressure on debt servicing costs stemming from the share of bonds indexed to interest rates as Brazil navigates both local economic pressures and global financial conditions.
Original Source: money.usnews.com
