- The fact: The government’s economic team is planning a constitutional amendment (PEC) to target the center of the fiscal target and scale back subsidized credit concessions.
- The goal: Reduce the state's fiscal impulse to allow the Central Bank to lower the Selic rate without triggering inflation.
- The impact on your wallet: Fixed-rate and long-term IPCA+-linked fixed-income securities tend to fluctuate during the legislative process, while consumer stocks and Brazilian REIT-style funds (FIIs) gain potential relief.
The incoming administration's economic team is preparing a Constitutional Amendment Proposal (PEC) designed to force the public administration to target the center of the fiscal goal, accompanied by rigorous cuts to loans subsidized with below-market interest rates by state-owned banks. The initiative seeks to restore credibility to the country's public finances and give the Central Bank the technical conditions necessary to initiate a consistent cycle of interest rate cuts.
What does the Lula administration's new fiscal amendment propose for the fiscal target and credit?
The constitutional amendment spearheaded by the economic team establishes that the federal government's budget execution must be guided by the center of the primary surplus target, eliminating reliance on the lower bound of the tolerance margin. At the same time, the text outlines guidelines to limit the expansion of subsidized credit granted by state institutions, forcing the corporate sector to finance itself at rates closer to private market conditions.
In practice, the adjustment operates on two complementary fronts to combat excess liquidity in the economy:
By turning off the public spending tap and restricting favorable loans from BNDES, Caixa, and Banco do Brasil, the government reduces aggregate demand without relying exclusively on an elevated Selic rate. If the state consumes less and stops offering artificial interest rates to large corporate groups, inflation cools more quickly, paving the way for a drop in the country's benchmark interest rate.
Why did the pursuit of the fiscal target's center become a priority now?
In recent quarters, the financial market began pricing in the fiscal target based solely on its lower limit, which increased the perceived risk surrounding Brazil's public debt. This distrust translated directly into rising yields on long-term Tesouro Direto government bonds, which hit steep premiums due to uncertainty over the Treasury's ability to stabilize the debt-to-GDP ratio.
The economic team acknowledges that working at the bottom of the target erodes the effectiveness of monetary policy. When the market projects persistent deficits, risk premiums rise, the U.S. dollar strengthens against the real, and future inflation climbs. For the Central Bank to cut the Selic rate sustainably, the fiscal signal must be unquestionable, rather than just meeting the bare minimum of a formal margin.
Forces the government to plan revenues and expenses to hit the projected target precisely, without slack.
Obliges large corporations to seek capital in the private market via debentures and stocks.
Clears the technical path for the monetary authority to begin lowering interest rates.
What does reducing subsidized credit mean for companies and banks?
Historically, granting subsidized credit creates a severe distortion in the Brazilian economy: while ordinary consumers and small businesses pay high rates, large corporations secure billions in financing with favorable rates maintained by the National Treasury. This weakens the potency of the Selic rate, as a considerable slice of the economy remains immune to the Central Bank's monetary tightening.
With the limitation of these subsidies provisioned in the PEC, the business landscape shifts significantly:
- Greater capital discipline: Large corporations will have to prove the economic viability of their projects without relying on the state incentive counter.
- Stimulus to the capital markets: The search for private financing will drive new issuances of tax-advantaged debentures (debêntures incentivadas), CRAs, and CRIs.
- Higher borrowing costs: Sectors accustomed to cheap state-backed funding will face higher financial expenses on new investments.
- Competition for liquidity: The mass migration of corporations to the private debt market could drive up spreads on bank and corporate debentures.
How could this PEC affect the Selic rate and fixed income?
The trajectory of fixed income in the coming months will depend on the speed and rigor with which the National Congress receives the proposal. The mere presentation of the text by the economic team already acts as a brake on the future yield curve, but the market will demand the approval of its core points to consolidate the decline in long-term rates.
The PEC passes without significant dilution in Congress. Country risk recedes, yields on long-term IPCA+-linked bonds fall, and the Selic rate gains room for rapid cuts.
Lawmakers preserve subsidies for specific sectors and loosen the target's guardrails. The yield curve unspools again, and monetary relief is delayed.
For individual investors, the shift requires portfolio attention. Fixed-rate and inflation-linked bonds (such as Tesouro IPCA+ maturing in 2035 or 2045) record capital appreciation via mark-to-market pricing when future rates fall. On the other hand, anyone keeping capital exclusively in floating-rate investments (Tesouro Selic or daily-liquidity CDs) should prepare for gradually lower nominal yields as rate relief materializes.
What changes for your investments in stocks and FIIs?
If the fiscal adjustment and the reduction of subsidized credit translate into a lower Selic rate over the medium term, equities tend to be the primary beneficiaries. The Brazilian stock market historically trades at discounted multiples during periods of high interest rates; the prospect of falling Selic rates reverses this flow toward stocks and real estate funds.
Real Estate Funds (FIIs): Equity FIIs (malls, logistics warehouses, and office buildings) gain direct traction, as lower interest rates reduce real estate financing costs and increase the attractiveness of dividend yields relative to fixed income.
Consumer and Retail Stocks: Domestic-market-oriented companies benefit doubly from consumers' greater credit availability and lower debt-rollover costs.
Paper FIIs and Floating-Rate Fixed Income: Yields on CRI-backed FIIs indexed to the CDI will moderate as the benchmark interest rate declines.
What triggers should you monitor during the proposal's legislative passage?
The passage of a constitutional amendment (PEC) requires a special procedure in Congress, demanding approval by a three-fifths vote in the Chamber of Deputies and the Federal Senate, in two rounds in each house. Until the text is promulgated, the market will fluctuate with every statement from party leaders and rapporteurs.
Submission of the final text to Congress — Check whether the guardrails on subsidized credit remain rigid or were diluted from the initial draft.
Appointment of the rapporteur in the CCJ — Identify whether the chosen rapporteur supports the expenditure-containment agenda or represents sectors benefiting from subsidies.
First-round vote in the Chamber — Monitor the tally: a wide margin of approval signals a clear path and boosts the appreciation of long-term fixed-income securities.
Copom meetings — Observe whether the Monetary Policy Committee alters its statement to include the PEC as a factor of fiscal relief in its inflation projections.
Conclusion: How to position your portfolio right now?
The Lula administration's intention to present a PEC focused on the center of the fiscal target and the reduction of credit subsidies is a positive sign of alignment with public account sustainability. However, investors should not act precipitously before seeing the political strength of the text inside Congress. The most prudent strategy at the moment is to maintain diversification: lock in good yields on inflation-linked fixed income for protection and gradually build positions in equities and equity FIIs, capturing gains before the interest rate cutting cycle is fully priced in by market screens.
