Brazil – accelerating move towards “normality”

Brazil needs to accelerate the reduction in the public debt ratio, including the stock of domestic debt, in order to reduce interest rates. This will ultimately require both shorter-term fiscal adjustment and longer-term structural reforms. Gross domestic debt of no more than 40% of GDP would be highly desirable. This would roughly translate into a net debt level of 25%, deemed absolutely safe. This is where Brazil is headed in the short- and medium-term. It would nonetheless be highly desirable to accelerate this process. Real interest rate would adjust more quickly to levels seen in economies with similar public debt, investment and savings characteristics (e.g. Mexico), that is, real interest rates of no more than 2-3%, compared with 6-9% today. There is little reason to expect that Brazilian interest rates would be any higher provided it manages to reduce debt, improve the debt structure and in addition implement reasonable medium-term fiscal reforms aimed at both limiting long-term spending commitments and reducing government current spending.⁸ Brazil has shaken off its “country of the future (and always will be)” image. A further fiscal adjustment resulting in accelerated debt reduction and lower interest rates would at last make Brazil a “normal” country.

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Footnotes:

[1] The non-financial public sector (NFPS) comprises, in addition to the general government, public-sector-owned (non-financial) companies and the central bank. In 2008, the authorities decided to exclude Petrobras and Eletrobras from the PS debt definition on account of Petrobras’ sizeable investment programme (USD 225 bn or 10% of GDP).
[2] The “new” GG debt concept is a Brazilian innovation. By convention, the GG debt concept, which comprises the federal government (Treasury and social security fund), state and local governments, only allows for intra-GG netting. As the central bank is not part of the GG, GG-issued debt held by the central bank is therefore counted as GG debt. The authorities feel that only debt held by the public (including repos) should be counted as GG debt, arguing that GG debt held by the central bank exhibits risk features that are qualitatively different from those attached to debt held by the public.
[3] The debt restructuring of the 1990s led the federal government to effectively take on state and local government debts by issuing federal debt securities. This is why net federal government debt amounts to 27% of GDP even though federal debt securities (held by the public) amount to more than 50% of GDP. Note that sub-federal government debt ratios have been declining steadily over the past decade.
[4] The primary surplus excludes interest paid and investment income derived from financial investment.
[5] Eduardo Gianetti, O valor de amanhã, 2005.
[6] DB Research, Brazil, commodity prices & fiscal policy, March 2011.
[7] World Bank, Federal Public Financial Management Performance, 2009.
[8] DB Research, Brazil 2020: Economic & political scenarios, November 2009.

Copyright © 2011 • Deutsche Bank AG, DB Research

Deutsche Bank Research is responsible for macroeconomic analysis within Deutsche Bank Group and acts as consultant for the bank, its clients and stakeholders. We analyse relevant trends for the bank in financial markets, the economy and society and highlight risks and opportunities. DB Research delivers high-quality, independent analysis and actively promotes public debate on economic, fiscal, labour market and social policy issues.

Published by kind permission of Thomas Mayer.