Like many, we were suprised to see Lula secure a record 4th term from the Brazilian elections over the weekend. At the start of the month, we did warn in BRL’s Bolsonaro Boost that “recent head-to-head polling had Lula and Bolsonaro statistically tied, meaning the first-round result shouldn’t be interpreted as guaranteeing a Bolsonaro victory.”
The knee-jerk reaction in BRL and in most Brazlian assets has been swift and sharp, as traders try to digest just what this means for Brazil going forward. As just one example, the Ibovespa fell 13.9% (its worst day since early 2020).
The Lula victory is unambiguously a fiscal risk event in the near term. But the medium-term trajectory is what we’re now more focused on, and this hinges almost entirely on whether Lula can credibly signal fiscal consolidation or not.
Here’s how we now see things heading for Brazil.