Record maturity of interest-bearing bonds in 2023 underscores heavy cost of debt

The maturity of Brazilian government bonds linked to the basic interest rate will reach a record in 2023, highlighting the challenges for public debt service, at a time when spending plans of President-elect Luiz Inácio Lula da Silva delay the prospects of monetary easing .

The maturities of post-fixed securities, the so-called LFTs, will reach R$464 billion in the year, the highest volume ever recorded, with concentration in March (R$178 billion) and September (R$286 billion).

The higher the basic interest rate, the greater the Treasury disbursements. And this perspective became more nebulous after Lula’s support for a package of R$ 168 billion, already approved by Congress, which circumvents the constitutional spending ceiling to fulfill campaign promises.

The Treasury told Reuters that the 2020 debt issues, increased by the pandemic, influenced this high maturity, noting that its liquidity reserve of R$ 1 trillion allows “to anticipate periods of greater concentration of maturities and mitigate the risks of debt refinancing public”.

Even so, the perspective of higher interest rates for a longer period of time, which gained strength after the package was presented, is worrying, said former Treasury Secretary Mansueto Almeida, recalling that the country’s interest rate curve shows real interest rates not seen in nowhere else in the world, standing above 6% for long horizons.

The Central Bank interrupted an aggressive tightening cycle in September, after 12 consecutive increases that took the interest rate from the lowest value in history of 2%, in March 2021, to 13.75%.

But the yield curve, which once priced in a rate cut in March 2023, now incorporates a same-month rise, with rates consistently in double digits along its length.

“If the next government does not make it very clear what the new fiscal rule is, we will have this interest, both short and long term, very high”, said Mansueto, chief economist at BTG Pactual.

“This has to change, otherwise it will hurt private investment a lot and lead to a very worrying trajectory of public debt growth. It is a very negative sign and I think Brazil runs the risk of eventually being downgraded by risk rating agencies.”

Public debt is expected to close this year at around 74% of GDP, the lowest level since 2018, helped by nominal GDP growth, prepayment of federal bank loans and net debt redemptions, with the Treasury preferring to use its reserve liquidity to reduce bond issuance.

Even so, the ratio remains above the average of 65% of emerging countries, with economists estimating that it could approach 90% of GDP at the end of Lula’s term if a fiscal adjustment is not made to counterbalance the budgetary expansion.

Mansueto said that the release of additional spending by the PEC “scares” and should not have exceeded R$ 100 billion.

A new fiscal framework to replace the discredited spending cap should ideally be unveiled in the first quarter, he added, saying the new government should also pursue measures to boost revenues, citing the return of 50 billion reais in federal fuel taxes.