Brazil’s public debt likely to rise significantly in years ahead

Public debt of Brazil is expected to increase significantly in the coming few years, according to a Societe Generale research report. Policymakers should find ways to attain a primary surplus urgently without impacting growth prospects in order to prevent the nation from falling into the debt-interest-deficit trap, said Societe Generale.

Last year, the country’s fiscal balance worsened to a deficit of 10.4 percent of the GDP from a deficit of 6 percent in 2014 and 3 percent in 2013. Most of the deterioration was because of falling revenue growth, whereas public spending growth continued to stay high because of mandatory spending backed by legislation and political inclination.

The public debt/GDP ratio has risen considerably in the past two to three years because of high deficit and low nominal GDP growth. In September 2016, gross public debt was up to 70.7 percent of GDP from 51.7 percent in December 2013. Net debt rose to 44.1 percent of GDP from 30.6 percent in the same period.

Brazil’s public debt/GDP ratio is increasing because of three factors. Firstly high interest rate payment is needed on existing debt, secondly more net issuance given the increasing primary deficit and thirdly lower nominal GDP growth resulting in smaller growth in the denominator. Moreover, any significant depreciation of the Brazilian real also adds to the debt burden because of exchange adjustment, stated Societe Generale.