Brazil’s fiscal planning is facing an unexpected layer of uncertainty as officials prepare to refresh macroeconomic forecasts that underpin this year’s budget, according to sources involved in the discussions. Market turbulence linked to the conflict in Iran has complicated projections that the Finance Ministry is to publish within two weeks for 2026 GDP growth and inflation - key inputs for the government’s bimonthly revenue and expenditure report.
The first fiscal report of the year, due by March 24, will reassess projected revenues and planned spending against the approved budget and determine whether a spending freeze is required to keep the government within statutory fiscal limits. Two sources familiar with the discussions said the recent geopolitical shock has added difficulty to those calculations.
Price shocks in global crude markets are central to the uncertainty. Since the conflict emerged less than two weeks ago, oil has swung sharply - briefly nearing $120 a barrel before retreating to about $83 on Tuesday. The budget that lawmakers approved for the year assumed Brent crude would average about $65 a barrel, along with GDP growth of 2.4%, inflation at 3.6% and an exchange rate of 5.76 reais to the dollar.
Those moves in oil have fed through to currency markets: Brazil’s real weakened last week but subsequently recovered, trading around 5.14 per dollar in this session. The Treasury signaled last week that oil at levels up to $85 a barrel could improve fiscal receipts, while warning that prices above $100 a barrel could start to generate tangible inflationary pressures.
Higher crude prices are a mixed development for Brazil. As the country’s top export, oil lifts government revenue through royalties and dividends from state-controlled oil company Petrobras, supporting the coffers. At the same time, a source involved in planning cautioned that if "the war shows no signs of ending and refineries or production are disrupted or halted, there will be medium-term damage," highlighting the risk to inflation and monetary policy.
Those inflation concerns have shaped market expectations for the central bank’s long-awaited easing cycle. Investors are increasingly pricing a more cautious approach from monetary authorities - anticipating a 25-basis-point rate cut rather than the 50-basis-point move previously contemplated. That would imply higher average interest rates over time.
Higher average rates carry fiscal consequences because nearly half of Brazil’s large public debt is indexed to the benchmark Selic rate, which has been held since July at 15% - the highest level in almost two decades. A third source from an economic team warned that a prolonged conflict would probably worsen debt dynamics, offsetting the direct revenue gains from elevated oil prices.
The coming fortnight is therefore pivotal for Brazil’s fiscal management: updated 2026 growth and inflation forecasts will inform the March 24 report, which in turn could dictate whether spending controls are necessary to comply with fiscal rules amid a backdrop of volatile oil markets, currency moves and changing expectations for monetary easing.
Key points
- Updated forecasts for 2026 GDP and inflation are due within two weeks and will feed into a fiscal report due March 24 that could trigger a spending freeze.
- Oil price volatility since the Iran conflict has pushed Brent from near $120 to about $83 a barrel; the budget assumes roughly $65 a barrel.
- Markets now expect a smaller initial rate cut from the central bank (25 basis points versus 50), affecting debt servicing costs because nearly half of public debt is tied to the Selic.
Risks and uncertainties
- Prolonged conflict that disrupts production or refineries could drive medium-term inflationary pressure - impacting monetary policy and consumer prices.
- Higher global oil prices could simultaneously raise government revenue through royalties and dividends while increasing inflation, complicating fiscal and monetary trade-offs.
- Elevated interest rates relative to expectations would raise debt-servicing costs given the large share of debt linked to the Selic, worsening debt dynamics despite potential oil-driven revenue gains.