Brazil's budget deficit nears pandemic-era levels as fiscal concerns linger

By Marcela Ayres

BRASILIA, July 31 (Reuters) - ‌Brazil's overall ​budget deficit ​widened to nearly 10% of gross domestic product (GDP) in the 12 months through June, central bank data showed on Friday, reaching its ‌highest level since 2021 as elevated interest costs weighed on ⁠public finances.

The shortfall rose to 1.3 trillion reais ($257.03 billion), equivalent to 9.99% of GDP, from 9.61% ‌in May and 7.27% a ‌year earlier.

The reading was the highest since April 2021, when the deficit reached 10.25% of GDP as Latin America's largest economy grappled with extraordinary spending ​linked to the COVID-19 pandemic.

Many economists see Brazil's fast-growing interest bill amid high interest rates and elevated risk premiums as its biggest fiscal vulnerability, and ⁠investors remain skeptical about the government's ability to stabilize debt as public spending continues to rise.

The figure ​also underscored Brazil's weaker fiscal position relative to its peers, as it came in well above the roughly 6% average deficit ​projected by the International Monetary Fund for ‌emerging market and middle-income economies this year.

DEBT CLIMBED UNDER LULA

In the 12 months through June, interest payments reached 8.80% of GDP, ⁠accounting for the bulk of Brazil's nominal deficit, while the primary deficit stood at 1.19% of GDP.

Gross public debt rose 0.9 percentage points from May to 81.9% of GDP, ⁠above the 81.5% forecast by economists polled by Reuters, driven mainly by accrued interest expenses ​and net debt issuance.

Since President Luiz Inacio Lula da Silva took office in January 2023, Brazil's gross debt -- regarded as the country's main solvency metric -- has increased 10.2 percentage points ‌of GDP.

In June alone, Brazil's nominal interest bill totaled 110.7 billion reais. The public sector posted a primary deficit of ‌55.3 billion reais, while economists in a Reuters poll had expected a 49.8 billion-real ⁠shortfall.

As a result, the overall ‌deficit reached 166 billion reais ​in the month. The market forecast was for a shortfall of 133.2 billion reais.

($1 = 5.0578 reais)

(Reporting by Marcela Ayres; Editing by ‌Gabriel Araujo)

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