The large rise in the Brazilian government’s budget deficit, to 8.9% of GDP, over 2023 as a whole should partially reverse this year. But the key point is that the underlying sovereign debt dynamics are worsening. And unless the government pulls out all the stops to hit its fiscal framework targets – which seems unlikely in our view – the debt-to-GDP ratio will rise further. That’s likely to limit how far the central bank lowers interest rates and could also cause Brazil’s risk premium to rise from its current low level.
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