Brazil's leading banks have sharply cut their forecasts for economic growth next year, putting pressure on President Luiz Inacio Lula da Silva's pledge to fund campaign promises while returning the budget to surplus.

Bradesco, one of Brazil's largest banks, lowered its 2027 gross domestic product forecast to 0.4% on Friday, while brokerage and financial platform XP cut its estimate to 0.3%. Both had previously expected growth of 1.0% next year, Reuters reported.

The revisions followed similar moves by Itau, Brazil's largest lender, and BTG Pactual, which last week reduced their 2027 forecasts to 0.5% and 0.6% respectively. Valor International reported that Itau had cut its estimate from 1.2% to 0.5%, citing higher interest rates and weaker activity.

Growth far below government forecast

When it submitted next year's budget bill to Congress in August, Lula's government projected growth of 2.46% in 2027. Economists now expect activity to expand at only a fraction of that pace, as uncertainty about Lula's next government, high interest rates and tighter financial conditions weigh on demand.

All four institutions cited expectations that Brazil's interest rates will stay high for longer. The central bank ended a run of cuts this week and kept its benchmark Selic rate at 13.75%, with a worsening inflation outlook behind the decision.

Weakest growth since 2016

Growth in the range of the four forecasts would be the weakest performance in Latin America's largest economy since 2016, excluding 2020, when the Covid-19 pandemic hit, Reuters reported.

It would also add to concern over gross debt of nearly 83% of GDP. The Finance Ministry said it was reviewing its economic assumptions and could not comment before updated forecasts are released later this month.