Brazil Lifts Forecast for Share of Interest-Rate-Linked Debt to Record High This Year

• Brazil’s Treasury on Wednesday revealed a worsening public debt profile this year, projecting that the share linked to the benchmark Selic rate could reach a record 53% of the outstanding stock. With more liabilities tied to floating rates, higher borrowing costs feed directly into debt accumulation.
• Although Brazil’s central bank began easing its policy in March, the benchmark rate remains at 14%, while 12-month inflation stood at 4.2% in mid-August, leaving the country with one of the highest real interest rates among major economies. The new Treasury projection came in its revised annual financing plan, which forecast floating-rate debt at 49%-53% of the total this year, up from a previous projection of 46%-50%. The share grew to 51.1% in July.
• Latin America’s largest economy finances an unusually large portion of its debt through floating-rate bonds, a tool designed to maintain investor demand during periods of market stress. The Treasury has relied more heavily on such instruments amid weak appetite for inflation-linked securities, even while offering real yields above 7% on very long-dated bonds.
• “The increase in the share of floating-rate securities in federal public debt reflects a combination of heightened volatility and elevated interest rates, contributing to stronger investor preference for shorter-duration instruments that are less sensitive to interest-rate fluctuations,” the Treasury said in a statement.
• It also lowered its forecast for inflation-linked debt to 21%-25% of the total from 23%-27% previously, while the projected share of fixed-rate securities was cut to 20%-24% from 21%-25%. Foreign-exchange-linked debt remained at 3%-7%.
• The shift comes amid global market turbulence and concerns over Brazil’s fiscal outlook. Gross public debt, the country’s main measure of solvency, reached 81.9% of GDP, up more than 10 percentage points since President Luiz Inacio Lula da Silva took office.
• The updated projections were released alongside July public debt data, which showed the federal debt stock rising 0.22% from the previous month to 9.289 trillion reais ($1.8 trillion), based on an exchange rate of 5.1550 reais to the dollar.

(Source: Reuters)