Brazil’s fiscal balance will become a central priority starting in 2027, regardless of who wins next year’s presidential election, according to Alberto Ramos, head of Latin America macroeconomic research at Goldman Sachs.
Ramos told Reuters that there will be increasing pressure on the nation’s next administration, whether it is headed by current President Luiz Inacio Lula da Silva or an opposition candidate, to implement a major economic correction.
Fiscal discipline can’t wait
Rising revenues and a consistent rise in spending have characterised Brazil’s present fiscal trajectory.
A primary balance of zero for 2025 and a minor surplus of 0.25% of GDP in 2026, with a tolerance margin of 0.25 percentage points, are among the government’s goals.
This implies that a 0.25% deficit in the upcoming year can still be deemed within the aim.
However, Goldman Sachs’ calculations tell a far more difficult story.
According to the bank, Brazil requires a primary surplus of more than 2.5% of GDP to change its debt dynamic, meaning fiscal adjustment of about 3 percentage points of GDP is still needed.
Ramos pointed out that this is an adjustment that cannot be avoided, as the government could not implement the same fiscal management policy as in Lula’s ongoing term.
Debt on an upward path
Central bank data shows Brazil’s gross public debt rose to 78.1% of GDP in September, the highest since late 2021.
When former president Jair Bolsonaro left office, that number was 71.7%.
Treasury predicts that the debt ratio will further increase to 84.2% of GDP by the end of 2028, before slowly starting to decrease.
Debt-heavy scenarios do imply a stabilisation eventually, Ramos pointed out, but an extended period of high ratios could expose Brazil to outside or internal shocks.
High indebtedness, if sustained, usually undermines market confidence, increases borrowing costs, and limits policy space during stress.
Markets seek credible commitments
Current tensions over the budget still need to play out ahead of the 2026 election.
Polls last month put Lula in the lead in the race for a 4th, non-consecutive term in office.
Still, Ramos said that markets will probably react more to serious fiscal commitments than to whoever wins politically.
While momentum behind an opposition candidate might spark an initial market rally, analysts note that for investors, the crux will be actual policies and the effects on debt sustainability.
The central problem, Ramos explained, is not ideology but rather the ability to implement sustainable fiscal consolidation.
Monetary outlook: future cautious easing
Regarding monetary policy, Goldman Sachs anticipates that in early 2025, Brazil’s central bank will start lowering the Selic benchmark rate, which is now set at 15%.
Ramos warned that robust economic activity and high election-year spending could postpone the first drop until March or later, despite the baseline prediction indicating a reduction in January.
How soon inflation expectations decline and whether fiscal policy starts to indicate more restraint will determine when the rate reduction takes place.
In order to prevent creating more pricing pressure, the central bank may decide to take a cautious approach if government spending continues to be high in the lead-up to the election.
However, Ramos said that Brazil’s long-term fiscal sustainability goes well beyond near-term targets and will only be secured through structural reforms that can enhance expenditure quality and broaden the tax base.
Faced with high spending requirements, demographic pressures, and limited fiscal space, the government has limited capacity to pursue inclusive growth without increasing debt.
The post Brazil’s fiscal reality set to dominate agenda after 2026, Goldman Sachs warns appeared first on Invezz
