Cost of new public debt issues reaches highest level in 4 years

In a scenario of rising interest rates and greater uncertainty regarding the situation of public accounts, the average cost of issuing public debt securities by the National Treasury reached 8.9% in January, the highest level since February 2018.

In that month, the average cost was 9.12% and was on a downward trend, in the wake of the reduction in the basic interest rate, the Selic. Now, the trend is going in the opposite direction.

This month’s data will only be known in March, but the National Treasury has already indicated in its monthly debt report that inflationary pressure and geopolitical tensions “continue to increase risk aversion in global markets”. In Brazil, one of the effects is the increase in interest rates.

The increase in the average cost of new issues increases the interest bill on the public debt.

The Selic rate is currently at 10.75% per annum, after being at a low of 2% between the year 2020 and the beginning of 2021. The rise in the basic rate ends up influencing the cost of public debt, as well as the acceleration of inflation —part of the shares have remuneration linked to price indices.

According to the general coordinator of Public Debt Operations of the National Treasury, Luis Felipe Vital, the increase in interest rates is a global movement, in the wake of the withdrawal of monetary stimuli by countries like the United States. American interest rates end up affecting other markets, including Brazil.

“The main economies are withdrawing monetary stimuli that they gave in the past, some of them even with a faster speed. We are experiencing a global movement, and Brazil is no different,” he said.

Specifically in January, the escalation of tensions between Ukraine and Russia also contributed to the upward movement in issuance costs. “This created a perception of risk. In general, the emerging ones had a worsening of risk perception”, said Vital.

In addition to external factors and the increase in the Selic rate, the acceleration of inflation and a greater expectation for long-term interest by investors end up interfering in the average cost of public debt issuances, said Vital. Long-term interest is affected by investors’ perception of risk, including on the tax issue.

The uncertainties regarding the situation of public accounts come from the presentation of the PEC (proposed amendment to the Constitution) of the Precatórios, which allowed the government to postpone part of the payment of judicial debts against which there is no longer any appeal – which was seen by critics of the measure as a default by the Union.

In Congress, the PEC had its scope expanded and ended up changing the spending ceiling, a rule that works as a fiscal anchor for the government, to accommodate more expenses in the year in which President Jair Bolsonaro (PL) will seek reelection.

More recently, the government has discussed proposals to exempt federal taxes on diesel and cooking gas, a measure that could result in a waiver of R$19.5 billion, according to calculations by the economic team.

In 2021, public debt fell to 80.3% of GDP (Gross Domestic Product), but bodies such as the Senate’s IFI (Independent Fiscal Institution) project a further increase in this indicator this year.

On the other hand, the Treasury has been able to issue a greater volume of issues with longer maturities, which contributes to a healthier debt management. The share that matures in five years or more is 24%, the highest since August 2019.

Vital, however, admitted that the trend is still upward in the cost of emissions. “We continue with the prospect of raising interest rates,” he said.

In January, the stock of federal public debt stood at R$5.6 trillion, a slight increase (0.05%) compared to the value observed in December 2021.

Although the incorporation of interest to be paid to investors is a factor in the increase in the stock, January is usually a month marked by the highest volume of redemptions — when bondholders receive the amount invested back. Hence the small variation in the total debt volume.

The Treasury technician also pointed out that the agency has a reserve of R$ 1.1 trillion in resources to honor debt commitments, which gives the government greater comfort to curb new issuances in times of greater volatility, when the cost can show too expensive. In an election year, this is a particularly important precaution.

“The Treasury outlines scenarios for moments of greater volatility. If at some point in the year we have greater volatility due to the elections, for example, this is considered in our planning”, said Vital.