Key Takeaways:
Brazil will scrap emergency fuel subsidies if Brent crude stabilizes around $80 a barrel, the Finance Ministry's top official said, as progress toward a U.S.-Iran peace deal reshapes the country's inflation and monetary policy outlook.
Brazil will end subsidies for diesel and gasoline if the price of crude oil stabilizes around $80 per barrel due to progress toward a U.S.-Iran deal to end their conflict, the executive secretary of the Finance Ministry, Rogerio Ceron, told Reuters.
"If it stabilizes around $80 a barrel, there will be no need to maintain these (fuel subsidy) measures. We will withdraw them prudently," Ceron said in a Tuesday interview. He said the next 30 days would be key to assessing whether that scenario holds, stressing caution after sharp swings in oil prices, interest rates and exchange rates.
Brent crude fell 5.1% on Tuesday to $78.96 a barrel as details emerged of a provisional deal to reopen the Strait of Hormuz, which had been disrupted since the conflict began in late February. Since then, President Luiz Inacio Lula da Silva introduced emergency measures including tax cuts and subsidies on diesel, gasoline, jet fuel and cooking gas. Most measures were designed to last about two months, with the option of extension, and many expire in July.
Ceron said de-escalation in the Middle East would likely improve inflation expectations and ease pressure on long-term interest rates, giving Brazil's central bank more room to keep cutting interest rates. The central bank is set to deliver its rate decision Wednesday. The Brazilian real has strengthened from about 5.20 to around 5.00 per dollar, offsetting some of the inflationary pressure from higher oil prices, Ceron noted.
Fiscal Stimulus Debate
Private-sector analysts estimate Brazil's economy has received more than 200 billion reais ($39 billion) in stimulus this year as Lula heads toward an October re-election bid, coming largely from subsidies and guarantees outside the government's primary budget balance. Ceron rejected those estimates.
"If there were a stimulus of 2% of GDP, growth would be closer to 3%. There is no stimulus of that magnitude," he said, pointing to recent data such as retail sales showing "significant deceleration." The Finance Ministry forecasts GDP growth of 2.3% this year, within a 2.0-2.5% range Ceron said is not inflationary. Market forecasts stand at 1.96%, according to a central bank survey.
Ceron said some analysts are conflating fiscally neutral measures, such as expanded income tax exemptions, with policies that only marginally boost activity, such as subsidized credit for truckers, app drivers and delivery workers.
Global Factors Driving Yields
Ceron acknowledged fiscal challenges facing Brazil but said high interest rates are not driven only by fiscal conditions, pointing to structural factors such as low domestic savings. He said the recent rise in Brazilian debt yields was driven mainly by strong U.S. economic data and global repricing.
"Our spread relative to the U.S. is not out of line with historical levels," he said. The last time Brazil's yield spread widened to current levels was during the 2020 pandemic selloff, when the real weakened past 5.50 per dollar and the central bank cut the Selic rate to a record low of 2.0%.
Brazil is likely to issue new sustainable bonds in the second half of the year, with other news expected during Finance Minister Dario Durigan's visit to China, Ceron added. Reuters has reported that Brazil is preparing to announce its first sovereign yuan bond issuance, known as Panda bonds, during the trip.
If oil stabilizes near $80, the removal of fuel subsidies would reduce Brazil's fiscal burden but could add upward pressure on domestic fuel prices. For global crude markets, the U.S.-Iran deal prospect adds supply-side pressure that could cap oil prices, while the reopening of the Strait of Hormuz would restore flows from one of the world's most critical energy chokepoints.
This article is for informational purposes only and does not constitute investment advice.
