Brazil’s Public Sector Finances
Everything you always wanted to know about Brazil’s public debt (but were afraid to ask)
Net public sector debt has been declining, more or less, continuously since 2002. Thanks to large primary surpluses and solid economic growth, net debt has declined from more than 63% of GDP in September 2002 to less than 40% of GDP in July 2011. Similarly, gross government debt declined by 20% of GDP, from a peak of 82% of GDP in September 2002 to 63% of GDP today. Meanwhile, gross domestic government debt has remained largely unchanged due to the sizeable domestic debt issuance necessary to finance public-sector assets accumulation.
The structure of public sector liabilities has improved tangibly over the past decade. Significantly, the public sector became a net foreign (currency) creditor in 2006. The share of both FX- and Selic-linked debt has diminished and the overall maturity structure has improved. As a result, were a financial shock equivalent to 2002 to occur today, the net debt ratio would fall by 3% of GDP rather than increase by 17% of GDP. Indeed, the debt ratio did decline during late 2008 on the back of a sharp currency depreciation. Gross financing requirements remain nonetheless large by international standards.
Net public debt will continue to decline over the short to medium term. Under our baseline scenario, the ratio will decline by an average of 1.0-1.5% of GDP a year. Under an optimistic scenario – one where a tighter short-term fiscal policy combined with a medium-term adjustment reduces real interest rates materially – net debt could fall to as low as 20% of GDP by 2020. Such a scenario is, however, unlikely to materialise. By contrast, gross government will decline more slowly, depending on continued FX reserve accumulation and likely further lending to official banks by the Treasury.
It would be highly desirable to upgrade the present fiscal framework. Targeting primary surpluses was an appropriate policy when government solvency was at stake. With medium-term solvency not an issue anymore, it is time to “fine-tune” fiscal policy by shifting toward a structural (cyclically-adjusted) primary sur-plus target, or, even better, a structural nominal balance. This “upgrade” should be accompanied by broader structural reforms.