Reading Brazil's Government Debt

CEIC Brazil Data Talk: Brazil's general government gross debts have remained above 58% of its gross domestic product (GDP) since December 2012; as of August 2013, overall general government gross debt was reported at 59.14% of GDP, or approximately BRL2.75 billion, raising concerns about the sustainability of Brazil's public finances. Public sector gross debt as a percentage of GDP rose from a recent low of 54.15% as of December 2011 to 59.78% during November 2012. The sharp increase can be largely attributed to debt incurred under Central Bank (Bacen) operations, which increased from a low of 8.25% of GDP in December 2011 to a recent high of 15.70% of GDP as of May 2013. Increased debt from Bacen operations has, in turn, coincided with sharp depreciation of the Brazilian real during that period. Perhaps more alarmingly, the increase in government gross debt has also seen the foreign debt component increase from around 2.5% of GDP (during early 2011 to early 2012) to around 3.0% of GDP (mid-2012 to mid-2013). As of August 2013, general government debt owed to foreign sources amounted to BRL148.16 billion (almost 3.2% of GDP), rising from a recent low of BRL125.64 billion during January 2013. On the flip side, the government has attempted to stem these increases in gross debt by controlling debt incurred from the domestic debt market, most notably debt arising from national treasury securities, securitised debt and agrarian debt bonds (TDA). While the government has been criticised for rising public debt, the administration has argued that its public indebtedness should be evaluated via its public sector net debt – the consolidated net debt of its non-financial public sector and Bacen operations with the financial system (both public and private), the non-financial private sector and the rest of the world. This allows a more complete understanding of its public finances – especially given that general government gross debt covers just federal, state and the municipal government. In particular, a significant proportion of its public debt has been offset by rising general government assets as a proportion of GDP. General government assets as a percentage of GDP rose from 27.24% during December 2011 to 31.69% during December 2012 before moderating to 28.40% during August 2013. After accounting for its asset holdings' arising from credit with financial institutions, Bacen portfolio and exchange equalisation, among others, Brazil's government finances appear to be much healthier, with reported public sector net debt as a percentage of GDP amounting to just 34.74% compared to 35.92% during December 2012 and 37.08% during December 2011. Furthermore, while increased exchange rate volatility has somewhat necessitated an increase in the debt from Bacen operations, this was partially offset by high US dollar denominated reserve holdings, hence reducing its public sector net debt. Despite the declining public service net debt as reported by Bacen, the increase in gross public debt has placed doubts on the sustainability of Brazil's government debt. Recent social unrest in Brazil has also made it less likely for Brazil to finance rising debt through increased austerity measures, less they provoke further public hostility. If anything, the administration may well be prompted to raise social expenditure while reducing public taxation. By Bruno Vasconcelos Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
18th October 2013 Reading Brazil's Government Debt