Brazil expects to keep most of its debt issuance in local currency in the coming year, but will likely see either US dollar or euro-denominated issues as its only diversification away from the real, the nation’s head of public credit said on Thursday.
“We should do something in the dollar market, even this year or early next year. Next year, also, a euro-denominated deal. But this is more a future one, so we must prepare a roadshow. But we are open for business,” said ,” Jose Franco Medeiros de Morais, Brazil’s secretary for public debt told the LatinFinance Brazil Finance and Investment Forum.
Morais said that as of now they are done with financing for the local market this year as the country does not have much debt coming due and has all it needs to cover its primary deficit.
“In the first quarter of next year we have a huge amount of debt coming due. Something like 700 billion reais in the first four months and we intend to have all the resources necessary to pay this debt, we intend to have that by the end of this year,” he said.
As a result of the COVID-19 pandemic, Morais said the government had shortened the duration on its local debt to about 2 years from a prior average of 4.5 years. In early June, Brazil issued $3.5 billion worth of five-year and 10-year debt in US dollars.
In the first half of 2021, perhaps even within the first three months of next year, Morais said there might be scope for issuing in the euro market, depending on conditions.
“The technical position in the market is quite good. Investors have plenty of money to invest. My expectation is the situation is not going to change from now to next year,” he said.
“All this liquidity provided by central banks and by treasuries around the world, they are here to stay. My expectation for the following years is a really very liquid economy internationally, and this money will flow to emerging economies. Brazil should be prepared to be one of the destinations for this money,” he added.
Brazil has not issued in the euro market for quite some time, Morais said.
“We do not intend to have an efficient yield curve as much as we have in the dollar market. But you know it is always good to diversify. It Is also a kind of challenge,” he said, noting that the impetus for meeting with European investors would be to better explore the ESG (environmental, social, and governance) market.
And while that might be the main reason to issue in the euro-denominated market, the government is not pushing as fast because of budget rigidity, where only 5% is considered discretionary.
“In order to do an ESG you have to create a framework. The reality is the budget in Brazil is already extremely rigid. I do not want to put more rigidity in the budget. All these bonds, social bond or environment bond, it does not necessarily help in terms of providing flexibility to the budget,” Morais said.
“That does not mean we do not care about the ESG agenda,” he said.
SPENDING CAPS
Morais said it was critical for Brazil to maintain confidence among the international investment community by maintaining the federal spending caps currently in place.
“The spending cap is not the problem. The spending cap is the solution,” he said, referencing the history in Brazil of rising GDP and revenues over the last 30 to 40 years, that alongside rising taxes became untenable.
“We cannot just keep raising taxes,” Morais said. “If people do not want to have a fiscal rule as rigid as the spending cap, anyway what you have to do is cut expenditure. We could cut expenditure without having the spending cap. But in a country like Brazil given all the cultural background it is very important to have a fiscal anchor. And the current fiscal anchor is the spending cap. We can discuss whether this is the best one, but this is not the appropriate time to have a discussion.”
The government earlier this week said it raised the economic activity forecast to -4.5% from -4.7% for 2020. That is in contrast with the economic forecasts from the International Monetary Fund/World Bank World Economic Outlook that had Brazil’s economy shrinking 5.8%5 this year, followed by a rebound with growth of 2.8% in 2021.
Morais said it was important to try to contain the extra spending that has led to a debt-to-GDP ratio that will likely reach 96% by the end of the year as a result of the response to the COVID-19 pandemic. “It was already quite high even before the pandemic. At the beginning of this year it was at something like 77%,” he said.
If Brazil chooses to break through that spending cap, Morais said that was the political decision for which his team of technocrats are “being very vocal” on what a change in the fiscal path would mean for the nation.
Concern has grown in the market, and on Wednesday Fitch Ratings affirmed the nation’s BB- credit rating but with a negative outlook, citing “severe deterioration in Brazil’s fiscal deficit and public debt burden during 2020 and persisting uncertainty regarding fiscal consolidation prospects, including the sustainability of the 2016 spending cap…”
S&P Global, in April, revised its rating down to stable from positive but maintained a BB- rating on Brazil.
“A downgrade is not the baseline scenario,” Morais said.
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