The hidden weight of Lecaps: how capitalized interests impact public accounts

In the financial sphere, where each piece of data can have far-reaching implications, transparency and in-depth analysis are crucial to assess the sustainability of a country’s fiscal policy. In this context, the capitalization of interest from Lecaps (Treasury Capitalizable Bills) constitutes an element that should not go unnoticed, both due to its magnitude and its impact on fiscal results and on the evolution of the stock of public debt.

In October, the interest capitalization of Lecaps reached $2,631,862 millionaccording to the Public Debt Operations report prepared by the Congressional Budget Office (CPO). This figure brings the accumulated interest capitalized between April and October 2024 to $9,457,906 million.

To measure the relevance of this data, the $2,631,862 million per month is approximately equivalent to US$2,657 milliona considerable amount for the financial balance of any emerging economy.

A debate on tax registration

The discussion around how these interests are recorded has profound implications for fiscal analysis. Currently, the financial result presented by the Treasury is prepared on a cash basis, which implies that the capitalized interests are not reflected in the official numbers of the monthly financial surplus or deficit. In this way, the accumulated financial result for the year shows a surplus of $2,964,930 million. However, when incorporating the impact of capitalized interest, this surplus would be transformed into a deficit of $6,492,976 million.

This accounting practice does not constitute an irregularity or an attempt at concealment; However, it does raise questions about how to correctly assess the country’s fiscal sustainability. Investors and analysts should consider this factor when examining public finances, as the cash basis may present an incomplete picture of the government’s financing needs.

Impact on debt stock

Interest capitalization does not disappear; it simply changes its accounting location, increasing the public debt stock. In a context where the Treasury claims not to increase debt through new net emissionsthe stock growth can be partially explained by the indexation of instruments tied to inflation and the exchange rate. However, a growing proportion comes from the capitalization of interest from instruments such as Lecaps.

This phenomenon has long-term implications. If at some point the Treasury decided—whether by its own decision or due to market pressure—to limit the growth of the debt stock, the real demands to meet the accrued interest would be significantly greater than those currently reflected in the fiscal numbers. This would have a direct impact on the needs to generate a higher primary surplus to guarantee debt sustainability.

Final considerations

The government, when presenting its financial results, does not incur a lack of transparency or deliberate distortion. However, the omission of capitalized interest in the calculation of the financial surplus leaves out a relevant portion of the real cost of borrowing. This does not invalidate the fiscal achievements in terms of the primary result, but It should be taken into account by analysts and investors who evaluate the country’s fiscal health.

The growing magnitude of capitalized interest and its impact on the debt stock must be part of the comprehensive analysis of public finances. Ignoring these elements could lead to underestimating the true financing needs of the State, especially in a scenario where the market demands reducing debt exposure or face higher refinancing costs.

In short, debt sustainability and fiscal credibility depend not only on the results officially presented, but also the ability of investors and analysts to incorporate a complete vision that considers all the variables at play. The capitalization of interest, today, is one of those variables that cannot continue to go unnoticed.