Brazil’s debt climbs as state-run firms post record deficit

Brazil’s general government gross debt, the main gauge of the country’s public debt burden, rose to 82.51% of gross domestic product in July, Central Bank data released Aug. 31 showed. It was the highest level since April 2021, when the ratio stood at 82.62%.

The debt-to-GDP ratio has risen 10.8 percentage points during President Luiz Inácio Lula da Silva’s third term. Lula is a member of the Workers’ Party (PT).

General government gross debt comprises the federal government, the National Social Security Institute (INSS) and regional governments. The ratio rose 0.6 percentage point in July, marking the seventh consecutive monthly increase. In nominal terms, gross debt reached R$10.9 trillion.

Debt drivers

The Central Bank attributed the increase mainly to nominal interest expenses, which added 0.8 percentage point to the ratio, and net debt issuance, which contributed another 0.2 point. Growth in nominal GDP partly offset the increase, reducing the ratio by 0.5 point.

The consolidated public sector — comprising the federal government, states, municipalities and state-owned companies — spent R$99 billion on debt interest in July.

Over the 12 months through July, nominal interest expenses reached R$1.15 trillion, equivalent to 8.67% of GDP. That was up from R$941.2 billion, or 7% of GDP, in the 12 months through July 2025.

Fiscal outlook

Goldman Sachs economist Alberto Ramos said in a report that debt is likely to continue rising given the Lula administration’s “expansionary fiscal stance.”

“The lack of spending control has severely undermined the credibility of the fiscal targets and contributed to an overheated and excessively indebted economy. In addition, a weak fiscal anchor has raised fiscal risk premiums, resulting in the de-anchoring of short- and medium-term inflation expectations,” Ramos said.

Rafael Rondinelli, an economist at MAG Investimentos, said the 10.8-percentage-point increase in the debt ratio under Lula reflects the “sharp increase in spending and the resulting need to keep interest rates at elevated levels.”

Brazil’s Selic base interest rate currently stands at 14%.

Banco Pine projects gross debt will rise to 83.3% of GDP by December 2026 and 87.9% by December 2027.

Gross debt has increased 3.9 percentage points so far in 2026.

State-owned companies

Brazil’s federal state-owned companies posted a record R$8.27 billion deficit from January through July, Central Bank data also released Aug. 31 showed. It was the largest nominal shortfall for the period since the series began in 2002.

The deficit widened 49.8% from R$5.52 billion in the same period of 2025. The Central Bank figures exclude oil giant Petrobras and state-controlled financial institutions such as Banco do Brasil and Caixa Econômica Federal.

Economists see the measure as an important gauge of how state-owned companies affect the public finances.

XP Investimentos economist Tiago Sbaderlotto expects state-owned companies at the federal, state and municipal levels to post a combined deficit of R$10.2 billion in 2026, equivalent to 0.1% of GDP, mainly “due to the performance of [Brazil’s postal service] Correios.” That would be the largest deficit in the Central Bank series.

Sbaderlotto estimates federal companies will account for roughly R$8.2 billion of the shortfall, with state and municipal companies contributing the remaining R$2 billion. XP therefore projects a primary deficit of R$48.2 billion, or 0.4% of GDP, for the consolidated public sector.

“The results of state-owned companies show a similar trend to previous years, with the deficit worsening as a result of a policy of higher spending. Correios is undoubtedly the state-owned company that causes the greatest concern, but we could see problems at other companies in the near future,” Sbaderlotto said.

Gabriel Uarian, chief analyst at Cultura Capital, said “the concentration of the shortfall, particularly at Correios, points to management weaknesses and increases the risk that new capital injections or government guarantees will be needed, putting pressure on the public finances and reducing fiscal room for maneuver.”

Correios losses

Correios posted a net loss of R$5.55 billion in the first half of this year as the postal service undergoes a financial and operational restructuring.

Last year, the company raised R$12 billion in loans from five financial institutions backed by federal government guarantees. The government’s 2027 annual budget proposal, submitted Monday, provides for a R$6 billion federal capital injection into the company.

As a share of GDP, the deficit at federal state-owned companies reached 0.11% in the first seven months of the year, the highest level since 2009, when it stood at 0.12%, with a R$2.13 billion shortfall.

Energy sector

Sara Paixão, a macroeconomics analyst at InvestSmart XP, also highlighted the financial condition of federally controlled energy companies, particularly Eletronuclear, which is facing difficulties related to construction of the Angra 3 nuclear power plant.

Still, Paixão said it is “important to emphasize that a significant portion of the state-owned companies reporting negative results perform strategic functions for the country.”

The Ministry of Management and Innovation in Public Services, Correios and Eletronuclear were contacted for comment but did not respond.

(Estevão Taiar contributed reporting.)

* By Hamilton Ferrari — Brasília

Source: Valor International

https://valorinternational.globo.com/