Debt weight in GDP plummets and indicator trend divides analysts

The rise in inflation and the recovery of the economy made a significant contribution to reducing the Brazilian debt in the last 18 months, contradicting projections made in the first year of the pandemic, when the indicator reached a record level.

In October 2020, the general government gross debt/GDP ratio reached 89%, a record value for the Central Bank’s historical series. Since then, it has dropped to 78.3%, a level very close to that seen before the pandemic.

At that time, analysts consulted by the BC even projected that gross debt would be around 95% of GDP in 2020 and 2021 and would continue to almost 100% from 2026, the year in which the spending ceiling ends. In other words, a trajectory of constant growth.

The increase in debt in 2020 was mainly due to the issuance of bonds to finance actions related to the pandemic, such as the payment of emergency aid. It was also a period of falling GDP (Gross Domestic Product) and low inflation, other factors that affect the calculation.

In 2021, the economy started to grow again, inflation soared and there was a reduction in expenses and an increase in revenues with the help of the new commodity boom – the public sector accounts have been in the black since last year.

Currently, projections point to a debt/GDP of 81% at the end of 2022, reaching 86% between 2025 and 2029, falling to 84% in 2030.

Rafaela Vitória, chief economist at Banco Inter, attributes the fall in debt to some unexpected facts. Among them, a structural improvement in revenue, which should still guarantee growing surpluses in public accounts in the coming years, given the expectation of maintaining commodity prices at levels above those of the pre-pandemic.

She also mentions inflation, which has a positive effect on revenues and a negative effect on main expenses, which are readjusted once a year. This was also a period of cost containment, due to the cap rule and the addition of readjustments to civil servants, and with the return of resources from BNDES and sectoral funds that helped to reduce indebtedness.

For Vitória, more important than the current level of debt is the downward trajectory, which should not change, even in the event of a revision of the spending ceiling, regardless of who the next president is.

“Not only the [relação] debt/GDP fell, as the trajectory is now much more benign”, says the economist, who predicts a peak of 81% in 2027 and a fall in the following years.

According to the IMF (International Monetary Fund), which allows for international comparison, the Brazilian debt will end this year at 90% of GDP, below the level of advanced economies (119%) and above the average of emerging economies (65%).

Juliana Damasceno, analyst at Tendências Consultoria, believes that the fall in debt was due to artificial issues that are masking a scenario of uncertainty in relation to fiscal policy and a worsening in the debt profile.

She says that the country has a high level of indebtedness and that debt reduction projections in the coming years do not include an abrupt end to the spending ceiling and some fiscal bombs, such as the postponement of payment of precatories.

Damasceno says that government revenues are artificially inflated, because of inflation and company gains from the rise in commodities, two factors that begin to lose strength from 2023. He also cites the pressure for readjustment in the civil service.

“We had factors influencing this debt down quite intensely in 2021 and 2022, but it is for reasons that we should not celebrate and that are not sustainable in the medium and long term”, says Damasceno. “It is unsustainable to make a fiscal adjustment with a wage freeze and inflation tax.”

According to BC data, the reduction of around 10 percentage points in debt since October 2020 was mainly due to nominal GDP growth, which is the value of GDP adjusted for inflation — a deflator that currently exceeds the IPCA is used.

This factor, alone, reduced the debt/GDP ratio by 15.6 percentage points until April this year. Redemptions higher than debt issues helped with another 2.1 points, and the exchange rate variation contributed 0.8 points. The incorporation of interest canceled almost half of this gain.

The IFI (Independent Fiscal Institution) projects gross debt to be 78.7% of GDP this year, 79.3% in 2023 and 81.7% on average from 2024 to 2031.

Daniel Couri, IFI’s interim executive director, says the debt has fallen not only because of inflation, which increases nominal GDP, but also because of the recovery in economic activity. The outlook for the coming years is for the indicator to grow, considering that, from 2023 onwards, the same vigorous growth in nominal GDP is not expected. The institution calculates that a primary surplus of 1.4% of GDP would be needed to stabilize the debt.

“It is worth mentioning the risk that exists in the pressure for an increase in primary expenditures and in revenue waivers (which can become permanent), which can deteriorate the trajectory of the public sector’s primary result”, he says.

In a report released earlier this year, the rating agency Fitch Ratings said that the economic recovery after the first impact of the pandemic was the main factor that helped to reduce global debt in 2021 – after the high spending of the previous year. In 2022, the contribution will come from inflation, which could reduce the global indicator by 2 percentage points of GDP.

The National Treasury estimates that the gross debt of the general government should close this year at 78.3% of GDP (Gross Domestic Product), rise to 78.5% in 2023 and gradually fall to 69.9% of GDP in 2031 – a level close to what was observed in 2016, according to a report released last Wednesday (29). The calculations indicate the possibility of Brazil registering growing surpluses in the coming years and consider maintaining the spending ceiling until 2026.