Iran conflict clouds Brazil outlook ahead of budget review

By Bernardo Caram

BRASILIA, March 10 (Reuters) – Brazil’s government faces an added challenge as it prepares to update its economic forecasts, with market volatility and uncertainty linked to the conflict in Iran complicating ​projections that underpin this year’s budget management, two sources familiar with ‌the discussions said.

The Finance Ministry is expected within two weeks to release its fresh forecasts for 2026 GDP growth and inflation, inputs for the government’s bimonthly revenue, and expenditure report.

The first report of the year, due by March 24, will reassess revenues and ‌spending ​against the approved budget and determine whether a ⁠spending freeze is needed to ⁠comply with fiscal rules.

“If the war shows no signs of ending and refineries or production are disrupted or halted, there will be medium-term damage,” the source added, citing concerns about inflation and monetary policy.

This year’s ​budget assumed GDP growth of 2.4%, inflation at 3.6%, Brent crude averaging about $65 a barrel, and an exchange rate of 5.76 reais to the ⁠dollar.

Since the conflict erupted less than two ⁠weeks ago, oil prices have swung sharply, briefly nearing $120 a ​barrel this week before retreating to about $83 on Tuesday.

Brazil’s real weakened last week ​but has since firmed, trading around 5.14 per dollar this ‌session.

Brazil’s Treasury said last week that oil prices of up to $85 a barrel could have positive fiscal effects, but warned that levels above $100 could begin to generate real inflationary pressure.

Oil is Brazil’s top export, and higher prices boost ⁠government revenue through royalties and dividends from state-controlled oil company Petrobras.

However, concerns about inflation stemming from the conflict have strengthened bets that the central bank may ⁠begin its long-awaited easing ‌cycle more cautiously than previously expected, with a 25-basis-point ⁠cut rather than 50.

Higher average interest rates would push ​up Brazil’s ‌debt burden, as nearly half of the country’s large ​public debt ⁠is linked to the benchmark Selic rate, which has been held steady since July at 15%, its highest in nearly two decades.

A prolonged conflict would likely worsen debt dynamics, offsetting the direct revenue gains from higher oil prices, acknowledged a third economic team source.

(Reporting by Bernardo Caram; Writing by Marcela Ayres; Editing ​by Alistair Bell)