Brazil: Flávio Bolsonaro’s gains boost markets, but leave fiscal adjustment in doubt

The gains made by Flávio Bolsonaro over Luiz Inácio Lula da Silva in the first round of Brazil’s elections have revived bets on a market-friendly economic shift. The senator won 47% of the vote, compared with 45% for the president, according to the coverage reviewed. The runoff is scheduled for October 25: until then, a change in economic direction remains a possible scenario, not a policy that has been decided or implemented.

The markets’ initial reaction was positive. Cinco Días reported an 8% rise in the Bovespa index, a fall in interest-rate futures and a 4% appreciation of the real against the dollar after the result. Those movements reflect investors’ expectations, but do not show that the next government will be able to deliver on its proposals.

An announced adjustment, but still no complete plan

Bolsonaro has proposed an adjustment equivalent to 1.5% of GDP in the first 18 months of his term. The options mentioned include asset sales, privatizations, tighter limits on spending growth and a review of tax exemptions. He has also spoken of reducing bureaucracy and taxes. However, the coverage notes that the campaign has not specified which budget items it would cut or which tax benefits it would review.

The difficulty lies in the composition of the budget. According to the Reuters Breakingviews analysis published by Cinco Días, discretionary spending accounts for less than 2% of GDP, while a significant part of the budget is committed to benefits, pensions and public-sector salaries. This limited room for manoeuvre could complicate an adjustment based on cuts and expose the government to political costs if sensitive budget items are affected.

Estimates of the fiscal effort required are not uniform either. Reuters Breakingviews cites calculations according to which, at current interest rates, a primary surplus of 4% to 6% of GDP would be needed to stabilize debt; another report quotes a consultant who considers it necessary to reach between 2% and 3% in the first year. These are calculations and opinions attributed to their respective sources, not a shared official target. In both cases, the gap between fiscal goals and the ability to deliver them is one of the central uncertainties.

Market confidence would also depend on the economic team

The election result increased interest in possible members of Bolsonaro’s team. Bloomberg Línea reported that names being considered included Marcelo Kayath, Mansueto Almeida, Roberto Campos Neto and Alexandre Bettamio. The report was based on anonymous sources familiar with confidential discussions; it did not amount to confirmed appointments.

The financial reputation of a potential minister could influence investors’ perceptions, but would not by itself be enough to resolve the budgetary challenge. Adriana Dupita, a Bloomberg Economics economist quoted by Bloomberg Línea, said that a name with credibility in the markets could reinforce the rally in assets if Bolsonaro won. She also warned that the campaign lacked viable proposals for the adjustment and that combining market experience with knowledge of the public sector and Congress would be important.

A pro-market shift would have costs and limits

A Bolsonaro government could prioritize faster fiscal consolidation through spending cuts, according to scenarios from Oxford Economics cited by Revista Mercado. The consultancy suggests that this path could initially improve market sentiment and create room to reverse some tax increases. But it also warns of a possible cost to economic activity, including the possibility of a brief recession during the initial phase of the adjustment. This is a consultancy’s scenario, not a guaranteed outcome.

The debate is not limited to the size of the cuts. If spending fell by less than expected and tax cuts were not offset by savings, the deficit could increase, raise financing costs and make inflation harder to control, Reuters Breakingviews warns. Conversely, a rapid adjustment could also cool economic activity. The specific combination of measures and their political approval would determine many of these effects.

The coverage also points to the possibility of Brazil drawing closer politically to the United States and right-wing governments in the region. Thomas Haugaard, of Janus Henderson, interpreted the result as a sign of broader demand for political change. Gustavo Pérego, of ABECEB, considered that a Bolsonaro victory could increase affinity with the government of Argentina’s Javier Milei, although he noted that bilateral trade also responds to productive ties, such as automotive trade. These are assessments of possible shifts in direction, not proof that trade relations will change.

For now, the electoral signal has been enough to move assets, but not to dispel fiscal doubts. The outcome of the runoff, the composition of the economic team and, above all, the details and legislative feasibility of any adjustment will be decisive in determining whether market optimism translates into an economic policy that can be implemented.