Brazil will remove emergency subsidies on diesel and gasoline if the international crude price stabilizes at roughly $80 a barrel, the executive secretary of the Finance Ministry said in a detailed interview. The official linked the potential withdrawal of measures to signs of de-escalation in the Middle East that appear to be influencing oil markets and financial conditions.
Brent crude fell 5.1% on one trading day to $78.96 a barrel as details of a provisional arrangement to reopen the Strait of Hormuz surfaced. The finance official said that a roughly 30-day period will be decisive to determine whether the lower and steadier price trajectory holds, and that the government will proceed cautiously given recent volatility in oil prices, interest rates and the exchange rate.
"If it stabilizes around $80 a barrel, there will be no need to maintain these (fuel subsidy) measures. We will withdraw them prudently," the executive secretary said, noting that the authorities designed most emergency measures to be temporary and included extensions as an option.
Since the conflict began in late February, the president has enacted a package of emergency steps to shield consumers and certain sectors from higher energy costs. Those steps have included tax reductions and direct subsidies covering diesel, gasoline, jet fuel and cooking gas. Many of those measures were set up to run for about two months and are due to lapse in July, a timetable the official said provides room to assess the effects of any ceasefire.
The Finance Ministry official framed two paths forward for the measures - bringing them to an early close if market conditions improve, or allowing them to expire as originally scheduled. He stressed caution in light of the sharp swings that have affected energy and financial markets in recent months.
On the exchange rate front, the official pointed out that the Brazilian real has strengthened from around 5.20 to about 5.00 per dollar, partly offsetting inflationary pressures associated with higher oil prices. He argued that much of the recent upward revision in inflation forecasts was driven by the conflict in the Middle East rather than by domestic stimulus.
"If you exclude the impact of the war, there is no significant inflationary stress," he said, while rejecting analyses by some economists who assign primary responsibility for the recent increase in inflation forecasts to government stimulus measures.
With a stabilization in oil prices, the official said, inflation expectations - which had moved further away from the central bank's 3% target - should reverse quickly. That reversal would, in his assessment, provide monetary authorities with "more room to maneuver" on interest rates ahead of a central bank policy decision scheduled for Wednesday.
Private-sector analysts have estimated that stimulus measures this year amount to more than 200 billion reais, or about $39 billion, with much of that support taking the form of subsidies and guarantees kept outside the government's primary budget balance. The finance official disputed 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, referencing recent indicators such as retail sales that he said show "significant deceleration." The ministry's current forecast for GDP growth is 2.3% for the year, which falls inside a 2.0-2.5% range the official views as non-inflationary. By contrast, market forecasts compiled in a central bank survey stand at 1.96%.
The official also argued that some analysts conflate measures that are fiscally neutral - for example, broader income tax exemptions - with programs that provide only modest, targeted boosts to activity, such as subsidized credit for truckers, app drivers and delivery workers.
On debt markets and yields, the finance official acknowledged persistent fiscal challenges but cautioned against attributing high interest rates solely to domestic fiscal conditions. He pointed to structural features including low domestic savings and to global factors driving yields, saying the recent rise in Brazilian yields was largely due to strong U.S. economic data and a broader global repricing of risk.
"Our spread relative to the U.S. is not out of line with historical levels," he said, reiterating that international dynamics have been an important driver of recent moves in yields.
Looking ahead on issuance, the ministry expects to offer new sustainable bonds in the second half of the year. The government is also preparing to announce its first sovereign yuan-denominated bond issuance, commonly referred to as Panda bonds, during the finance minister's upcoming trip to China, the official added, without providing additional details.
Currency conversion cited in discussions used the rate $1 = 5.0880 reais.