(Bloomberg) -- Brazil will post a 2024 fiscal result better than expected by investors who are skeptical about the country’s ability to shore up public finances, Treasury Secretary Rogerio Ceron said Tuesday.

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The economic team will cancel part of the 40.5 billion reais ($7.4 billion) in spending that was excluded from this year’s fiscal target. The amount could reach as much as 10 billion reais and would improve the primary deficit, which excludes interest payments, Ceron said in a Zoom interview from Sao Paulo.

The government authorized spending out of the country’s fiscal goal for items such as helping Rio Grande do Sul state, which was hit by record floods earlier this year, and fighting wildfires across the country. Some of it, however, won’t be needed.

A smaller deficit would be good news even if it does not solve the country’s structural fiscal woes, said Milena Landgraf, a partner at Jubarte Capital. “It would be good news, without a doubt”, she said. “If this actually happens, it would be very good.”

Brazil’s public coffers represent the focal point of investor concern in Latin America’s largest economy. President Luiz Inacio Lula da Silva is increasing expenditures and dragging his feet on structural spending reforms while also relying more on extraordinary revenues. Put together, government debt is rising and inflation is expected to run above target in coming years.

Finance Minister Fernando Haddad said this week that Brazil should receive a sovereign credit rating upgrade within the next year. His views contrast with investor pessimism that has weighed on local stocks and turned the real into one of the worst-performing currencies in emerging markets in 2024.

Brazil will end 2024 with a 68.8 billion-real primary deficit, according to a budget report released Friday. The administration will only be able to meet its goal of having a maximum gap of 28.8 billion reais because the nation’s laws allow the government to carry out certain expenditures while not considering them in its fiscal target.

The report says the government is allowed to exclude 40.5 billion reais in spending from the 2024 limit.

The economic team has not given up on the plan to reform structural spending, Ceron said, but that objective requires political dialogue. Brazil will not be able to avoid reviewing mandatory expenditures that are linked to inflation after 2026, he said.

Central Bank

A larger deficit likely hinders efforts to control public debt at a time when the central bank is raising its interest rate. Brazilian policymakers, in turn, have also toughened their tone by singling out fiscal policy as top inflation risk.

“The slowdown in structural reform efforts and fiscal discipline, the increase in earmarked credit, and uncertainties over the public debt stabilization have the potential to raise the economy’s neutral interest rate, with deleterious impacts on the power of monetary policy,” central bankers wrote in the minutes to this month’s policy meeting, when they raised rates for the first time since 2022.

According to Ceron, debt will finish the year below 78% of GDP. Central bank data shows the amount ended June at 77.84% of GDP.

Debt is impacted not only by fiscal results, but also interest rates and GDP. The fiscal situation is improving, but the key rate hike will offset part of this improvement in the short term, according to the secretary. It adds up to 40 billion reais to Brazil’s debt, but this also is not permanent. Borrowing costs will come down, as an 8% real interest rate is not sustainable, he said.

Ceron also said Brazil could tap international bond markets in 2024 as the outlook for Latin America’s largest economy is positive abroad. “The window for issuances is very good at the moment,” he said.

--With assistance from Josue Leonel.

(Updates with analyst comment in 4th paragraph and new Ceron comments in 9th paragraph)

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