By Marcela Ayres

BRASILIA (Reuters) – Brazil’s government announced a projected increase in gross debt despite an improving primary balance. They aim for a 0.25% GDP surplus in 2026, with more ambitious targets thereafter.

In its annual budget guidelines bill, which needs congressional approval, President Luiz Inacio Lula da Silva’s administration set primary surplus targets of 0.5% of GDP in 2027, 1.0% in 2028, and 1.25% in 2029.

Despite these targets, gross public debt is expected to peak at 84.2% of GDP in 2028 due to high interest payments in the largest economy of Latin America.

During a press conference, Budget Secretary Clayton Montes recognized the need for spending and tax benefit reviews to meet the 2027 surplus target, particularly as a waiver on large court-ordered federal payments will expire.

Deputy Treasury Secretary Viviane Varga stated, “Necessary measures to deliver these results will be taken,” though specific strategies were not detailed.

The revised budget outlook shows a significant deterioration from late last year’s estimates, where Brazil’s Treasury forecast the gross debt-to-GDP ratio could peak at 81.8% in 2027. This change reflects expectations of elevated interest rates due to a stringent monetary tightening cycle by the central bank to control inflation, which has been partly driven by government spending.

The budget bill forecasts the benchmark Selic interest rate to reach 14.02% this year, declining to 7.27% by 2029. Currently, the Selic rate is at 14.25%, with another rate increase expected in May.

Additionally, the government projected an average exchange rate of 5.97 reais per U.S. dollar next year and an average oil price of $66.74 per barrel. As of Tuesday, the Brazilian real closed at 5.89 reais per dollar, and Brent oil was priced at $64.67.

FISCAL WOES

If the 2026 fiscal target is achieved, it would signify the first primary surplus in Lula’s current term, as previously anticipated by Finance Minister Fernando Haddad. However, skepticism remains among private economists and investors, especially with general elections coming next year, which often lead to increased public spending.

“The budget guidelines bill released today is unrealistic,” noted investment firm Warren Rena, citing “inflated” revenue estimates and forecasting a primary deficit of 0.8% of GDP for the coming year.

Lula, 79, has expressed his intention to run for re-election in 2026 if health permits.

According to Tuesday’s projections, Brazil’s gross public debt—already higher than its emerging market peers—will rise by 10.1 percentage points of GDP during Lula’s term. The leftist leader has increased social benefits and household income, relying on progressive taxation to balance fiscal expansion. However, surging mandatory expenses, including pensions and welfare, raise concerns about the stabilization of public debt levels, compounded by a challenging global outlook that has driven 10-year sovereign bond yields above 14%.