Brazil's Fiscal Deficit Spirals as Electoral Pressures Mount

Brazil closed the first half of 2026 under the mounting weight of a fiscal imbalance that goes beyond the cyclical: data released Tuesday by the Central Bank showed that the consolidated public sector posted a primary deficit of R$56.1 billion in May alone, sharply reversing the R$33.7 billion surplus recorded in the same month a year earlier. Over the past 12 months, the shortfall has reached R$149 billion, equivalent to 1.14% of GDP — and the trajectory keeps deteriorating: in April, it stood at 0.97%. Gross government debt climbed to 81.1% of GDP, above the 80.7% forecast by analysts polled by Reuters, while net debt reached 67.9% of GDP, according to the Central Bank.

The driver behind the slippage is well known. As Folha de S.Paulo reported, payments of court-ordered settlements and the electoral calendar imposed by Congress for the disbursement of parliamentary earmarks pushed federal spending higher in May, contributing to the worst balance since 2020 in inflation-adjusted terms. The political backdrop adds extra color: the Lula administration committed R$520 million to institutional advertising in the first half, more than double the R$213.5 million spent in the same period under the Bolsonaro government in 2022, the previous election year, according to Valor Econômico. BNDES, for its part, marked its 74th anniversary by announcing R$140 billion for the Nova Indústria Brasil program, reinforcing the government's bet on industrial policy as a growth driver — a strategy that coexists uneasily with the deterioration of public accounts.

Against this backdrop, the credit package unveiled by President Lula on Monday adds further pressure to the fiscal debate. The new phase of the Desenrola program — dubbed Desenrola Adimplentes and aimed at informal workers and self-employed individuals whose debts are current or up to 90 days past due — was met with skepticism from the private sector: only Caixa Econômica Federal and Banco do Brasil signaled participation, according to Folha. The government also authorized the use of FGTS funds as collateral for private payroll-deductible loans, capped at 1.99% monthly interest, and launched Fies Empreendedor for former students in good standing. In parallel, Senacon opened an investigation into the lenders Valor, Ágil, and Crefisa over allegedly abusive interest rates on non-payroll-deductible personal credit — a sign that political pressure on borrowing costs will not relent. The urgency of the agenda is underscored by an Anbima/Datafolha survey showing that 47% of Brazilians face high financial stress, and by Central Bank simulations showing that a credit card debt can double in less than eight months absent renegotiation.

Markets reacted with relative restraint. On Monday, the dollar closed nearly flat at R$5.172 in a thin session shortened by Brazil's World Cup match. On Tuesday, Ibovespa futures hovered around 175,700 points, with future interest rates moving higher. The FGV Economic Uncertainty Indicator rose 0.4 point in June to 111.3, driven by the expectations component, which hit its highest level since December 2024. Economist Anna Carolina Gouveia attributed the move to uncertainty over the Selic trajectory, geopolitical tensions, and the potential effects of El Niño on prices. Offering some relief on the inflation front, the IGP-M fell 0.5% in June after rising 0.84% in May, and the economists' consensus broke a 15-week streak of upward revisions, holding the IPCA forecast at 5.33% for the year.

On the corporate front, Braskem drew the day's negative spotlight. S&P downgraded the petrochemical company's rating to "D" after it obtained an injunction against creditors, treating the move as tantamount to a general suspension of payments, while JPMorgan cut its price target in half, to R$7.50. Raízen closed fiscal year 2025/26 with a R$27.1 billion loss, largely attributable to R$22.5 billion in impairment provisions following its out-of-court restructuring filing. In the opposite direction, iFood reported revenue above R$10 billion in the fiscal year ended in March, with EBITDA growing 40% to R$2.2 billion, fueled by diversification into fintech, ERP, and categories such as pharmacies and groceries. Cosan hired BTG Pactual to evaluate alternatives for its stake in Rumo, in line with its deleveraging strategy. And Energisa formalized Itaú Unibanco's entry into Denerge with a R$1.4 billion capital injection.

With the second half opening against the backdrop of the 30-year expiration of Brazil's first railway concession — the Malha Oeste, whose new tender is being prepared by the government — and the imminent electoral blackout that bars further institutional advertising starting July 4, market attention now shifts to the release of May's Caged employment data and second-quarter primary results, which will test whether the fiscal trajectory finds any inflection point before the electoral pressures of the second half intensify.