For the first time in almost 20 yearsBrazilian public debt indexed to the basic interest rate, the Selic, approaches 50% do total of bonds issued by the government. A sign that things are not going well for the government.
Post-fixed public bonds, LFTs, are considered a crisis paper. It is to them that the investor turns when he believes that the scenario will get worse. At the best moment of debt management, in 2014, this share fell below 20%. But since then, the volume has only increased.
Today, 47% of total debt is in LFTs. This means if the Central Bank raises the interest rate – as happened in September (0.25 percentage points) and should happen again on November 6 (expectation of 0.5 percentage points) – almost half of the government’s debt he is immediately more expensive.
Over the last week, the InvestNews spoke with financial market managers and economists, who expressed concern about the evolution of debt indicators. A situation that could lead to a longer cycle of interest increases, in the view of these professionals.
The total debt in post-fixed securities (stock) is currently R$3.2 trillion. One percentage point the extra on this account means nothing less than R$32 billion more in spending in the year. To give you an idea of what this means: all federal government investment in transport infrastructure in the country must be R$24 billion in 2024. With R$32 billion, the government would still be able to finance two and a half months of Bolsa Família, the program that currently serves 54 million people.
Raising the interest rate is not evil practiced by the Central Bank, let’s be clear. The BC has a mandate to keep inflation under control. And disruptions in fiscal matters fuel rising prices, whether due to increased public spending, putting pressure on demand for goods and services, exchange rate devaluation or increased distrust.
Having such a large share of Brazilian public debt indexed to the Selic intensifies a kind of negative spiral: the worsening of expectations leads the Central Bank to raise interest rates, which makes public debt more expensive – and this feeds back into concern about the future. This is why so many people have said that a “fiscal shock” is the only way to break this cycle.
In practice, what happens is that if there is uncertainty regarding future interest rates and the trajectory of public debt, no one wants to risk holding a bond that could end up yielding less than the basic rate. The most conservative option is to buy a paper linked to the Selic variation.
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Worrying trajectory
What is at the heart of the problem is the public debt trajectory. The International Monetary Fund (IMF), for example, stated this Wednesday (23) that the fiscal framework implemented by the government is not capable of stabilizing the debt – that is, it will continue to grow. In the fund’s accounts, Brazil’s gross debt will rise from 87.6% of GDP in 2024, reach 92% in 2025 and reach 97.6% of GDP in five years. In other words, in 2029, Brazil could have a debt almost the size of its GDP.
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A public securities debt – total public bonds that the National Treasury issues to finance the government –, reached R$7 trillion in August, the latest data available. To manage this growing debt, the government has increased the supply of post-fixed papers indexed to the Selic (LFTs).
Of the volume of securities sold this year (in net terms, discounting the portion of securities that matured), around 75% were LFTs. The choice to roll over the debt using LFTs – and not pre-fixed (LTN and NTN-F) or securities linked to price indexes (NTN-B) – is a strategy that the Treasury adopts to circumvent the negative market momentum. Now, investors even agree to lend money to the government, but they charge a high interest rate to do so.
To give you an idea, in the last weekly auctions that the Treasury held to roll over this truckload of debt, investors even asked for rates close to 13% per yearwell above the current basic interest rate of 10.75% per year. As it does not agree with this rate, the Treasury prefers to roll over the debt with bonds indexed to the Selic. If he agreed, he would be indicating that he agrees to commit to a very high rate for a long period of five or ten years.
To be negative climate of the market in relation to the tax is not new, but is taking on greater proportions in recent weeks. And it represents a contrast when looking at the economy’s short-term indicators: unemployment is at historic lows, while income and GDP are on the rise. At the same time, Brazil even managed to improve its credit rating granted by the Moody’s agency, which placed the country one step below investment grade.
None of this has excited investors. The real has been losing value and has one of the worst performances among the main global currencies, as well as the Brazilian stock exchange.
These numbers show that, In the investor’s mind, the good moment in the economy may be fleeting. GDP growth will occur at a much lower rate than debt expansion. Therefore, as the IMF showed, the debt/GDP ratio will worsen. And this disorganizes the economy. The way out of this situation is: 1) increase taxes, 2) cut spending or 3) increase inflation. The market is protecting itself from the third scenario, inflation – and it knows how the government has dedicated itself to increasing revenue and how it has had difficulties with spending cuts.
This information is expressed in another debt security: NTN-Bs, securities that yield a fixed rate plus inflation variation. Bonds maturing in 2027 today include a inflation projection (called implicit inflation) 5.75% per year. In the last 12 months, the IPCA accumulated an increase of 4.42%.
The problem with all this is that the negative market numbers directly affect the real economy. A higher dollar can generate inflation. Interest rate projections discourage long-term investments, necessary to improve the space for economic growth. High interest rates direct resources to fixed income investments. And the weakness of the stock market takes away an important fundraising instrument for companies, which are share offerings.
Could there be some exaggeration in this negative reading? It’s possible. Within the government, according to the InvestNewsthere is a reading that the market is “ignoring” the fact that a spending review package will be released after the municipal elections. And when these measures are known, there should be a positive correction in asset prices.
For now, the market prefers to pay and see.
