NextFin News - Brazil’s election-season economic debate is already converging on one uncomfortable question: can the country bring borrowing costs down without first repairing public finances that still lean on the deficit? Guilherme Benchimol, founder and chairman of XP Inc., argues that a meaningful fiscal overhaul is the precondition for cheaper rates and a better investment backdrop. His warning comes just days after Brazil’s government cut its blocked spending estimate to 17.9 billion reais and revised its 2026 primary budget deficit forecast to 52 billion reais, or 0.38% of GDP.
The numbers matter because they keep the fiscal argument from staying theoretical. The deficit estimate remains worse than the government’s 0.25% of GDP primary surplus target, and the improvement from May’s 60.3 billion reais shortfall is not enough to remove pressure from the bond market. In a country where fiscal credibility and monetary policy are tightly linked, that gap helps explain why investors still ask whether inflation can slow fast enough to justify materially lower rates.
Brazil’s central bank has already shown how carefully it is managing that tension. In March, Copom cut the Selic rate to 14.75% and said the move was consistent with inflation convergence over the relevant horizon. The bank’s minutes projected four-quarter inflation of 3.9% for 2026 and 3.3% for 2027Q3. That is a cautious easing path, not a signal that policy makers think the inflation problem is solved.
The fiscal debate is coming into sharper focus because the central bank cannot ignore the funding side of the economy. If the state keeps borrowing heavily, long-term yields stay elevated, the currency carries more risk premium and corporate borrowing costs remain sticky. That mechanism matters more than the headline deficit itself. A budget miss becomes a rates problem, and a rates problem becomes an investment problem.
Benchimol’s intervention also lands at a politically sensitive moment. Election debates in Brazil routinely widen into arguments over taxes, spending, and the credibility of the fiscal framework, but this year the stakes are sharper because the government is already relying on spending blocks and accounting adjustments to stay inside the rules. The latest report showed that after certain adjustments, the government still expects a primary surplus of 10.8 billion reais, or 0.08% of GDP, which it says remains consistent with its fiscal goal. That leaves two narratives competing at once: a technical argument that the framework still holds, and a market argument that the underlying deficit remains too wide for comfort.
Why The Deficit Is More Than A Budget Line
The first-order reading is simple: a larger deficit means more borrowing and, eventually, more yield. But the second-order effect is what makes Brazil’s case interesting. When fiscal policy looks uncertain, investors do not just price more government debt. They also question whether inflation will stay anchored if the state keeps leaning on credit while the central bank tries to cool demand. That keeps the term premium high, and it leaves rate cuts looking smaller and slower than they would in a cleaner fiscal environment.
This is why the story is partly cyclical and partly structural, and the distinction matters. The cyclical leg is obvious: spending blocks, revenue timing, and midyear revisions can swing with the budget cycle, as the July report itself shows. The government reduced the blocked spending total by 5.7 billion reais from the previous level and improved the deficit view from 60.3 billion reais. That kind of movement can reverse if revenue improves or outlays are delayed. Brazil has seen that pattern before.
The structural leg is different. Persistent doubts about the fiscal anchor make the market treat every temporary improvement as fragile. Once that discount rate rises, the economy feels it in the cost of capital, in mortgage and corporate funding conditions, and in the exchange rate. The state may be able to close a gap for a quarter or two. It is harder to restore confidence that the gap will not reappear when the campaign season intensifies. That is the regime problem Benchimol is pointing at, not just the latest forecast.
Copom’s March minutes are useful here because they show the central bank looking past one print. The committee said the Selic cut was consistent with inflation convergence, but it also published 2026 and 2027Q3 projections of 3.9% and 3.3%. Those figures sit close enough to target to allow gradual easing, but not close enough to justify complacency. If fiscal discipline weakens, the bank has less room to treat inflation as a fading cyclical issue. It must instead assume that higher funding costs and weaker confidence can keep price pressure alive.
The market’s own logic reinforces that view. Brazil’s sovereign curve is highly sensitive to political credibility because local investors, pension funds, and leveraged accounts are concentrated in domestic duration. A small change in the perceived probability of fiscal slippage can lift the long end of the curve even if global rates are unchanged. That steepening then transmits into the private sector, making it more expensive to finance investment and extending the payback period for new projects. The election debate therefore matters less as rhetoric than as a pricing signal.
“A meaningful fiscal overhaul is essential if the country is to bring interest rates down and create a better environment for investing.”
Benchimol’s point is not that Brazil lacks growth potential. It is that growth potential cannot fully show up while investors still require a fiscal risk premium. That is a mechanism, not a slogan. Brazil can produce a temporary improvement in the deficit without changing the longer-run pattern, but the market will not reward that improvement for long unless the political system shows it can defend the fiscal framework through a full election cycle.
What Would Change The Thesis?
The strongest counter-thesis is that the fiscal concern is still mostly cyclical, not structural. Under that view, the 2026 deficit is being distorted by the timing of revenue, spending revisions, and the government’s effort to stay inside its target band. The July report itself gives that argument some support. It lowered the spending block, improved the deficit view from May, and still left room for a framework-compliant surplus after adjustments. If growth holds and tax receipts improve, the deficit could narrow without forcing a larger policy break.
That is a real objection, and it deserves weight because Brazil has often seen fiscal numbers improve when revenues surprise higher or spending gets delayed. But the burden of proof is on the cyclical case. A cyclical problem should fade on its own. A structural credibility problem lingers through political transitions. The threshold that would falsify the structural-fiscal warning is straightforward: if Brazil’s 2026 primary outcome moves materially closer to the official target, with the deficit or adjusted surplus staying inside the framework without repeated one-off adjustments, then the case for a permanent credibility break weakens. If instead the campaign pushes spending promises higher and the 0.38% of GDP deficit becomes the baseline rather than the exception, the structural reading strengthens.
For markets, the difference is not academic. A cyclical adjustment tends to compress risk premiums for a while and then fades back into the old range. A structural one resets the range itself. That is the crucial second-order issue in Brazil now: whether this is a one-year budget wobble or the start of another long period in which fiscal uncertainty keeps local rates elevated.
In the short term, the base case is that Brazilian assets remain hostage to campaign headlines and budget revisions, with the rate curve reacting faster than the broader economy. In the medium term, the main variable is whether candidates treat fiscal repair as a binding constraint or as a talking point to be renegotiated after the vote. In the long term, the issue is more consequential: if Brazil cannot convince investors that the deficit will trend lower, then every attempt to reduce rates will run into a higher term premium and a more cautious private sector.
The upside scenario is a clearer political commitment to spending restraint, which would help ease the bond market’s skepticism and give Copom more room to continue easing. The downside scenario is a fiscal campaign that turns into a bidding war, forcing investors to demand even more compensation for long duration and making rate cuts harder to justify. The base case sits between those two: fiscal management stays technically within the rules, but credibility remains too fragile for a full repricing.
That is why Benchimol’s warning matters. He is not describing a temporary deficit miss. He is describing the cost of living with one. If Brazil wants lower rates, it will have to prove that the deficit is a policy problem, not a permanent feature of the price of capital.
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