The market's enthusiasm with the advantage of Flávio Bolsonaro (PL) over Lula (PT) in the first round caused future interest rates to fall sharply, the Stock Exchange to surpass the level of 200 thousand points and the dollar to fall below R$5 this week. The reaction reflected, among other factors, the expectation of a fiscal adjustment agenda in a possible opposition government.
For chief economists consulted by Folha, the continuity of this movement will depend on the ability of the next government, whether Flávio or Lula, to improve the trajectory of public accounts. A perception of greater debt control tends to reduce the risk premium demanded by investors and make room for a fall in interest rates, also favoring variable income assets.
The opposite is also true: the persistence of deficits and the increase in debt make it difficult to reduce the Selic rate and keep investors' caution high, favoring fixed income investments.
According to the projections of the PLOA (Annual Budget Bill) for 2027, sent by the government to Congress, Brazil's gross debt — which comprises the federal government, INSS (National Social Security Institute) and state and municipal governments — should end 2026 at 83.7% of GDP, the highest level in five years.
Considering Lula's current full term, the debt should increase by around 12 percentage points by the end of the year. During the government of Jair Bolsonaro (PL), the indicator fell from 73.72% to 71.68% of GDP, although it reached 87.66% in October 2020, during the pandemic.
The indicator is one of the main ones observed by investors to assess the trajectory and sustainability of the country's public accounts.
The expectation of greater fiscal discipline under Flávio was among the factors behind the positive market reaction after the first round. In the following trading session, foreign investors contributed more than R$10 billion to the Brazilian stock exchange.
The euphoria was also reflected in the country's risk perception. The five-year credit default swap (CDS) spread, a default protection contract, fell to 108.81 points, the lowest level since May 2024. The indicator works as a type of insurance against default: the lower the spread, the lower the risk perception.
The continuity of this movement, however, will depend on the transformation of expectations into concrete measures. The two candidates' government plans address the issue, but do not detail specific adjustment measures. Flávio proposes a "treasury" of public spending and promises to stabilize and then reduce the relationship between debt and GDP. Lula states that he intends to maintain the fiscal framework, control the growth of expenses and improve the efficiency of public spending.
As Folha showed, Flávio's economic team is also studying measures to promote an initial adjustment of around 2% of GDP, or R$250 billion, an amount pointed out by economists as necessary to stabilize the debt trajectory. Among the proposals under discussion are the decoupling of adjustments to Social Security and the BPC (Continuous Payment Benefit) from real gains in the minimum wage and the end of the constitutional floors that link spending on health and education to federal revenue.
Flávio publicly denies that he intends to adopt these measures. Lula, on the other hand, criticizes the possibility of cuts. "When he talks about cutting R$200 billion, do you know what they are going to cut? They are going to cut Pé-de-Meia, Farmácia Popular, Minha Casa Minha Vida, Merenda Escolar, Gás do Povo, they are not going to give an increase in the minimum wage for workers above inflation. And they are not going to give an increase in the minimum wage for retirees", he declared.
For chief economists, fiscal adjustment is important, although there are disagreements about how it should be done. For Felipe Salto, chief economist and partner at Warren Investimentos, the main challenge is to recover the generation of primary surpluses, that is, when revenues exceed expenses.
"This is not a major adjustment in the first year, which would be undesirable, including due to the recessive effect, at a time when the economy is already in a clear slowdown. The challenge, rather, is to present a cohesive adjustment plan, approved by Congress, that allows the surplus to be recovered, consistently, to a level of around 2% of GDP."
According to Salto, the adjustment must include measures with a relevant fiscal impact. "Super salaries in the public service, military pensions and parliamentary amendments have to be the first items on the list. But the program must contain actions to also contain the growth of mandatory spending [...] In my opinion, they must combine social and fiscal responsibility, preserving the achievements of the Constitution".
The pace of adjustment also worries BCA Research. In a report, the chief strategist of the CoreMacro area, Arthur Budaghyan, and analysts Max Malakhveitchouk and Matt Gertken assess that a significant fiscal tightening could lead Brazil into recession in 2027 and put pressure on shares by reducing company profits.
"Fiscal generosity under Lula has been the main force keeping Brazil out of recession. Anything more than a symbolic fiscal tightening could plunge the economy into a recession," they say. However, the consultancy also warns that, without sufficient measures to stabilize the debt, the appreciation of Brazilian assets after the first round could lose strength in months.
Felipe Salles, chief economist at C6 Bank, states that improving public accounts can reduce the risk premium and favor domestic assets, but will depend on the credibility of the measures adopted by the next government.
"If the market judges that the proposals can solve the problem and are achievable, assets may improve. Otherwise, if it thinks that the proposals are not feasible, assets may worsen", he states.
Rafaela Vitória, chief economist at Inter bank, states that the high Selic rate in recent years helped to make investments in reais attractive and, as a result, contained greater pressure on the exchange rate. She alludes to the interest rate differential in relation to the USA, which increases the attractiveness of Brazilian fixed income by offering high returns compared to American interest rates.
According to her, a relevant portion of the country's risk premium is concentrated in the future interest rate curve. When the market identifies signs of fiscal improvement, says Rafaela, the relief tends to appear first in the fall in longer interest rates, which also favors the Stock Exchange. For the short term, she defends cost containment measures, while, in the medium and long term, she cites changes in the health and education floors and in the criteria for readjusting social security benefits.
Danilo Igliori, chief economist at Nomad, states that, in the short term, the objective would be to open fiscal space to allow interest rates to be reduced and avoid an unsustainable debt trajectory. In the long term, Igliori advocates a broader discussion about the structure of the State and the efficiency of spending.
"What preceded the Real Plan, after much back and forth and a lot of pain, was a recognition that inflation was not an ideological issue. It was a problem that the country needed to address", he states.
José Márcio Camargo, chief economist at Genial Investimentos, also defends a review of mandatory spending and greater predictability for the debt trajectory. According to him, temporary revenues, such as those from oil, should be directed to reducing the deficit.
Camargo also cites the approval of the Spending Ceiling, in 2016, as an example of a measure that increased predictability for investors and was accompanied by a drop in interest rates.
Natalie Victal, chief economist at SulAmérica Investimentos, also assesses that exceptions to fiscal rules have reduced the predictability of public accounts. For her, the next government must adopt a stricter limit on the growth of expenses.
"A combination of structural measures to deal with mandatory spending [...] can decompress the risk premium and generate sustainably lower interest rates", he states.
