Brazil to face $112b refinancing cliff in early 2021

Brazil’s debt has ballooned to unprecedented levels due to the COVID-19 pandemic and the government faces a $112 billion refinancing cliff early next year, with April’s funding needs the highest ever for a single month.

Publicly, at least, Treasury officials in Latin America’s top economy insist there will be no problem getting investors to extend their loans. Their so-called liquidity cushion can cover at least three months of borrowing, Reuters reported.

Additionally, almost all of Brazil’s debt is denominated in reais and over 90% of it is held by domestic investors, many of whom are compelled to hold it by banking rules.

Financial analysts also see little risk of a boycott by lenders, which would likely trigger a serious crisis and wreak havoc on Brazilian financial markets.

But the chances of the Treasury running into difficulty rolling over the debt, due to sudden unfavorable political, economic or market conditions, are not zero. And it is likely to pay a premium for shifting so much debt at once, analysts said.

According to Treasury figures, some 605 billion reais ($112 billion) of domestic federal debt is coming due in the first four months of next year. That is 14.1% of Brazil’s domestic debt pile of 4.82 trillion reais.

The month to watch is April, when 283 billion reais of debt needs to be rolled over. That is 6.6% of Brazil’s outstanding debt and will be the biggest single month for maturing debt on record, according to the Treasury.

“It’s a big amount, and if people want to cut back their exposure a bit for whatever reason, it becomes a significant amount,” said Sergi Lanau, deputy chief economist at the Washington-based International Institute of Finance (IIF).

“It’s not a great situation to be in, but it would be a lot worse if it was external debt. We are not too concerned about the bunching of maturities. If anything goes wrong at that time though, then you are exposed,” he said.

IIF analysis shows that the government’s domestic debt maturing in April amounts to 3.7% of GDP, also an all-time high for a single month.

Economy Minister Paulo Guedes has said he sees “no problem” for the Treasury rolling over its debt. Around half of the 600 billion reais coming due early next year may already covered by an influx of cash from the central bank and public sector banks, he said.