O BRASIL CORRE SÉRIO RISCO DE TER UMA CRISE FINANCEIRA EM 2027!

Episode Overview

• This discussion examines the critical link between Brazil's fiscal policy and its persistently high interest rates, challenging the narrative that the Central Bank alone is responsible for the cost of credit.
• Mansueto Almeida, Chief Economist at BTG Pactual, provides a detailed breakdown of Brazil's deteriorating debt metrics, comparing the current economic landscape to previous administrations to highlight structural weaknesses.
• The episode serves as a reality check for investors and observers of the Brazilian economy, explaining why GDP growth remains resilient despite high rates and why the fiscal challenge will persist regardless of who wins the 2026 election.

Key Concepts

• The Two Drivers of High Interest Rates: Understanding Brazilian interest rates requires looking beyond the Central Bank. While the Central Bank sets the short-term rate (Selic), the long-term rate is determined by the Treasury's weekly bond auctions. When the market perceives high fiscal risk, it demands higher premiums to buy public debt, keeping long-term borrowing costs elevated regardless of monetary policy.

• The "Nominal Deficit" Trap: The most alarming metric is not just the primary deficit (revenue minus expenses), but the nominal deficit (primary deficit plus interest payments). With high debt levels and high interest rates, Brazil is running a nominal deficit of roughly 8.5% of GDP. This creates a vicious cycle where the cost of servicing debt consumes a massive portion of the budget, further driving up debt levels.

• Revenue vs. Spending Efficiency: A crucial historical comparison reveals that Brazil's current problem is spending, not revenue. During the second Lula administration (2007-2010), the country had a similar tax burden (approx. 34% of GDP) but generated a 3% primary surplus. Today, with nearly the same tax burden, the government runs a deficit. This indicates that public spending has become significantly less efficient and more rigid over the last 15 years.

• The Resiliency Paradox: Despite having one of the highest real interest rates in the world (over 10%), the Brazilian economy continues to grow (over 2% in 2023 and projected nearly 2% for 2024). This resilience is partly due to non-monetary factors like a strong agricultural performance in 2023 and the lingering effects of fiscal expansion, though the economy is expected to cool as the agricultural boom normalizes.

Quotes

• At 0:55 - "We have a high short-term interest rate that is fixed by the Central Bank, and a high long-term interest rate that is not fixed by the Central Bank, which comes from the weekly auctions that the Treasury holds to sell a bond, get money, and pay the expenses." - Explaining that fiscal credibility directly impacts the long-term cost of money, independent of the Central Bank's decisions.

• At 3:38 - "In the second Lula government... the tax burden of the federal government... was more or less close to 19% of GDP... [back then] there was a surplus of 3% of GDP... to reduce the debt. Today, with the same tax burden, there is a primary deficit." - Illustrating that increased tax collection is no longer sufficient to create a surplus because government spending has outpaced revenue growth.

• At 5:17 - "Total non-financial expenditure of the central government... will grow in this government, in a period of 4 years, close to 20% real. That is a lot, and it is one of the reasons inflation went up and the Central Bank had to raise interest rates." - Identifying the root cause of the current inflationary pressure: a massive real-term expansion of government spending.

Takeaways

• Monitor the Nominal Deficit for True Risk Assessment: When evaluating Brazil's sovereign risk, look beyond the primary surplus/deficit targets. The nominal deficit (currently ~8.5% of GDP) is the true indicator of the country's solvency trajectory and explains why long-term yields remain high.

• Expect Persistent Fiscal Challenges Post-2026: The rapid accumulation of debt (rising roughly 12 percentage points of GDP in four years) creates a structural problem that cannot be solved quickly. Regardless of the political outcome in the next election, the next administration will be forced to confront a rigid budget and high debt servicing costs.

• Differentiate Between Temporary and Structural Growth: While 2023 saw robust growth due to a record agricultural harvest, this was a specific event rather than a structural shift. Be cautious of projecting past growth rates into the future; as the agricultural effect fades, the drag from high interest rates will likely become more visible in the broader economy.