Brazil’s Fiscal Rebound Does Not Guarantee Lasting Debt Reduction

• Brazil’s improving fiscal performance means 2021 outturns will be better than previously forecast, but permanent stabilization and reduction of the public debt burden will require returning to primary surpluses in the coming years. 
• Fiscal prospects have improved due to strong revenue recovery and contained spending growth. Net central government revenues grew over 30% in real terms in 7Months of 2021 compared to the same period in 2020. Higher revenue growth reflects high nominal GDP growth and greater consumption of goods than services, the former being taxed more. 
• Combined with improved budgetary performance by regional governments, this means the general government primary deficit is likely to end 2021 below 1.5% of GDP, down from the 2.4% previously forecasted, despite the reintroduction of emergency aid to vulnerable segments of the population. Debt is expected to fall this year to 81.5% (previous forecast: 84.2%) of GDP from 88.8% of GDP last year. 
• The 2022 budget presented on 31 August envisages further consolidation, targeting a primary deficit of 0.5%, mainly as pandemic spending is unwound. Non-tax revenue assumptions appear cautious as they do not include income from concessions or privatizations, but the budget’s 2.5% growth assumption appears optimistic.

(Source: Fitch Solutions)