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Swap Rates Rise Further As Fiscal Concerns Mount

BRAZIL
  • Front end DI swap rates have risen a further 10bp today, taking gains over the last month to almost 90bp, as markets remain concerned about on-going fiscal pressures and the division between the administration’s desire for a lower Selic rate and the current BCB cautious stance. Lula said again today that the 10.5% Selic rate is too high for current inflation levels, while today’s BCB Focus survey showed a further increase in analysts’ inflation expectations. The swaps curve now prices in around 100bp of hikes this year.
  • The move also follows recent fiscal data, which showed the public sector fiscal deficit widening to 9.6% of GDP on a 12-month rolling basis in May, from a 6.3% deficit a year ago. In Goldman Sachs’ view, the clearly expansionary fiscal policy and the reluctance to control spending severely undermine the credibility of the fiscal targets, including the primary zero balance for 2024. They expect gross debt to remain on an upward trend, noting that primary surpluses above 2% of GDP (vs. -2.5% currently) are needed to put debt on a downward trend, which is highly unlikely near term.
  • Looking ahead, attention will be on the government’s fiscal report, due later this month, for signs of its commitment to the fiscal targets.
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