Brazil’s interest spending to rise to seven-year high, says Moody’s

The rise in the Selic rate should raise the Brazilian government’s interest expenses this year to the highest level since 2015, pointed out the risk rating agency Moody’s, noting that the move represents a risk to the country’s fiscal consolidation effort.

In a report released this Wednesday (16), Moody’s highlighted as other obstacles the proposals in Congress to reduce fuel taxation and macroeconomic uncertainties in the election year.

Moody’s calculates that interest expenses will end the year between R$600 billion and R$700 billion, around 7% of GDP (Gross Domestic Product), the highest level in seven years. In 2021, these expenses amounted to BRL 449 billion, equivalent to 5.2% of GDP, according to data from the Central Bank.

“The high share of floating rate debt in Brazil contributes to the susceptibility of the debt burden to rate increases,” said Moody’s, noting that this share is now 39% of total domestic securities debt, compared to 29 % in 2016.

When commenting on the proposals to reduce taxes on fuel, Moody’s said that the approval of a measure in this sense without due compensation will harm the recent impetus of high tax collection.

“At the same time, growing uncertainties surrounding Brazil’s fiscal policy and overall macroeconomic outlook ahead of the October 2022 elections are hurting investor sentiment, negatively impacting market confidence and leading to an increase in risk premiums.” , said Moody’s, noting that inflation expectations remain high and growth projections in 2022 and 2023 have undergone significant downward revisions.

Moody’s assigns Brazil a long-term foreign currency sovereign credit rating of “Ba2”, two notches below the minimum rating to be considered investment grade.

Fitch and S&P place Brazil at “BB-“, also considered speculative grade.