Iran Conflict Clouds Brazil Outlook Ahead of Budget Review

• Brazil's government faces an added challenge as it prepares to update its economic forecasts, with market volatility and uncertainty linked to the conflict in ​Iran complicating projections that underpin this year's budget management.
• The Finance Ministry is expected within two weeks to release its fresh forecasts for 2026 GDP growth and inflation, inputs for the government's bimonthly revenue and expenditure report.
• The first report ​of the year, due by March 24, will reassess revenues and spending ​against the approved budget and determine whether a spending freeze is needed ⁠to comply with fiscal rules. "If the war shows no signs of ending and refineries ​or production are disrupted or halted, there will be medium-term damage," the source added, ​citing concerns about inflation and monetary policy.
• This year's budget assumed GDP growth of 2.4%, inflation at 3.6%, Brent crude averaging about $65 a barrel, and an exchange rate of 5.76 reais to the dollar. However, since the ​conflict erupted less than two weeks ago, oil prices have swung sharply. It briefly neared $120 ​a barrel this week before retreating to about $83 on Tuesday. Brazil's Treasury said last week that oil prices of up to $85 a barrel could have positive fiscal effects, but warned that levels above $100 could begin to generate real inflationary pressure.
• Oil is Brazil's top export and higher prices boost ​government revenue through royalties ​and dividends from ⁠state-controlled oil company Petrobras. However, concerns about inflation stemming from the conflict have strengthened bets that the central bank may begin its long-awaited easing ​cycle more cautiously than previously expected, with a 25-basis-point (bps) cut rather ​than 50 bps.
• Higher ⁠average interest rates would push up Brazil's debt burden, as nearly half of the country's large public debt is linked to the benchmark Selic rate, which has been held steady ⁠since ​July at 15%, its highest in nearly two decades. A ​prolonged conflict would likely worsen debt dynamics, offsetting the direct revenue gains from higher oil prices, acknowledged a ​third economic team source.

(Source: Reuters)