Brazil's fiscal spiral hits record debt despite market rally on oil gains

The Ibovespa opened Monday up 1.5%, reclaiming the 178,000-point level, while the dollar slipped 0.54% to R$5.168 — and the market's tone crystallized the tension defining this moment in Brazil: a country whose day-to-day fundamentals are reasonably in order, but whose fiscal trajectory, in the words of BTG Pactual chairman André Esteves, is "out of place" and prevents interest rates from following a civilized path. Speaking at the opening of BTG Macro Day, Esteves argued that the Selic, currently at 14%, could sit at 7% if public debt were under control — and framed the electoral moment as a "golden opportunity" for Brazil to leave an institutional and fiscal legacy. The irony of the day is that, as the banker spoke, the Central Bank was releasing data that made his argument all the more urgent: gross debt reached 82.5% of GDP in July, the highest level since April 2021, up from 81.9% in June. In nominal terms, the stock hit R$10.947 trillion.

The public sector's nominal deficit came in at R$97.6 billion for July alone — a figure that, though better than the R$175.6 billion of July 2025, still carries an interest bill of R$98.9 billion for the month. Over the twelve months through July, the nominal deficit totals R$1.24 trillion, or 9.34% of GDP. Compounding the structural picture, federal state-owned enterprises posted a combined deficit of R$8.28 billion between January and July, the worst result for the period since the historical series began in 2002 — a jump of nearly 50% from the same span in 2025. The government had already announced a R$6 billion capital injection into Correios in the 2027 Budget, and now confirms that Eletronuclear will receive an additional R$651.8 million. These numbers directly contradict Planning Minister Bruno Moretti's signal that the government expects a primary surplus of R$18 billion to R$20 billion in 2027.

The Focus Bulletin released this morning by the Central Bank captures the market mood well: median inflation forecasts for 2026 edged down — from 5.02% to 5.01% on the IPCA — and the GDP growth projection for this year slipped from 1.95% to 1.92%. But inflation expectations for 2027 rose from 4.25% to 4.28%, above the midpoint of the target, and the Selic projected for year-end remains at 13.75%. At the same time, FGV reported that the Business Confidence Index fell for a second consecutive month in August, reaching 91.1 points, driven mainly by a 3.5-point drop in industrial confidence. The Economic Uncertainty Index rose 2.3 points to 111.7 — with elections, the Middle East conflict, and the interest rate path as dominant factors.

The geopolitical variable took on new dimension in this session. The United States' strike on Iranian launchers on Larak Island on Sunday sent Brent crude above US$90 a barrel, with Iran retaliating with attacks in Jordan and reporting a tanker hit in the Strait of Hormuz. For Brazil, the oil move is doubly relevant: it improves the real's terms of trade — partly explaining the currency's appreciation this morning — and boosts Petrobras shares, which led the Ibovespa's advance with PETR4 up 4%. The war was also the Lula government's official pretext for instituting a 12% export tax on oil back in March — but a court ruling on Monday suspended the levy, with Judge Diego Câmara stating that Camex could not use a resolution to recreate the effects of a Provisional Measure not reviewed by Congress, "on pain of circumventing due legislative process."

On the trade front, the Lula government resumes negotiations with Washington on Monday, with Vice President Geraldo Alckmin confirming that both tariff and non-tariff matters will be discussed with the U.S. Trade Representative. The internal read, according to Folha, is skeptical: presidential advisors fear the tariff hike could become permanent if the impasse drags on. In the auto sector, the fight for third place in August's domestic sales rankings offers a microcosm of foreign pressure on local industry: BYD overtook General Motors in the past week's cumulative tally, prompting the American automaker to offer last-minute bonuses to hold ground. A Bradesco BBI report sheds light on a broader dynamic: while direct steel imports fell 21% in the first seven months of the year, steel embedded in imported manufactured goods — especially vehicles — grew 19%, causing foreign steel to account for an estimated record 40.4% of Brazilian demand in 2026.

The electoral picture permeates all asset pricing. BTG/Nexus and AtlasIntel/Bloomberg polls reinforced the perception of a tight runoff between Lula and Flávio Bolsonaro, and FX traders cite the scenario as a volatility factor. Interest rate futures opened lower — the January 2027 DI fell from 13.615% to 13.60% — but the curve still embeds a hefty fiscal premium. Aneel maintained the yellow tariff flag for September, adding R$1.885 per 100 kWh consumed. Non-performing loans in free credit reached 6.4% in July, the highest level in the Central Bank's historical series, with the household rate hitting 7.8% — a data point made all the more relevant by news that Casas Bahia obtained a judicial suspension of all creditor claims for 180 days, with its shares surging more than 40% at the open, after the 2nd Bankruptcy Court of São Paulo granted the effects of the "stay period" in its judicial reorganization proceeding.

In the coming weeks, attention will split between the progress of trade talks with Washington — whose outcome could reshape Brazil's export profile — the trajectory of the Middle East conflict and its effects on oil and global inflation, and the STF ruling on the taxation of Vale's foreign subsidiary profits, suspended by Justice André Mendonça and carrying a potential fiscal impact exceeding R$142 billion for the Treasury over five years. Congress still needs to weigh in on the end of the 6x1 work schedule — CNI has already calculated that the measure raises costs even for companies operating on a 5x2 regime — and on tax reform, whose new VAT credits risk locking up R$57 billion due to registration inconsistencies among smaller suppliers. Meanwhile, President Lula hosts executives and bankers for dinner at Alvorada, seeking to signal to the market that, campaign rhetoric aside, dialogue with the private sector remains open.