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SearchThe first-round election boosted the real, stocks, and bonds, but investors are still waiting for details and evidence of the fiscal reforms the candidate has promised.
Flávio Bolsonaro’s lead over Luiz Inácio Lula da Silva in the first round triggered a favorable reaction in Brazilian markets. Investors bet that the result opened the possibility of a change in economic direction and greater fiscal discipline. However, the optimism depends on expectations: the senator has yet to present a detailed plan to reduce the deficit or demonstrate that he can turn his promises into measures.
According to results cited by Reuters and El Observador, Bolsonaro received 47% of the vote and Lula around 45%. The difference left both candidates on course for a runoff scheduled for October 25, but did not resolve the presidential race.
El Observador reported that, after the first round, the real appreciated 4.4% against the dollar and the São Paulo stock exchange opened with a strong upward trend, following a 7.8% jump. Yields on Brazilian euro-denominated bonds also fell. These figures describe the market reaction reported by that outlet; they do not guarantee that the gains will last.
Reuters cited analysts’ forecasts that stocks would rise further and the currency would strengthen. Those projections express expectations, not confirmed results. The precedent of the 2022 election—when the real and stocks also advanced after a better-than-expected first-round result for Jair Bolsonaro—serves as a point of reference, but does not make it possible to predict that the same trajectory will be repeated.
The bullish case rests on the expectation that a potential Flávio Bolsonaro government would contain spending and pursue reforms. Bloomberg, in a report published by InfoMoney, said that several investment firms believe Brazilian assets could continue to rise as they price in the possibility of greater fiscal discipline. It also warned that this confidence is based on still-limited information about how the adjustment would be implemented.
Proposals attributed to the candidate and his team include containing spending, reducing bureaucracy, and cutting taxes. El Observador added that the team proposes replacing the current fiscal rule, reducing the number of ministries by at least ten, limiting subsidies, and reviewing the tax reform. These are initiatives announced or attributed to the campaign, not policies that have been approved or implemented.
Economist Daniella Marques, Bolsonaro’s chief economic adviser, is looking to the spending-cutting agenda of Argentine President Javier Milei for inspiration, according to Bloomberg’s coverage published by InfoMoney. That reference does not clarify how the changes would be financed or what specific measures would be proposed to reduce the deficit.
The backdrop is a fiscal situation that media outlets describe as challenging. Bloomberg reported that the nominal deficit approached 10% of GDP and public debt exceeded 80% of GDP. El Observador cited a deficit close to 9% and debt equivalent to 82% of GDP. The differences reflect the figures and phrasing used in the respective reports; in both cases, investors’ concerns center on the cost of financing the state and the high level of interest rates.
The rally could lose momentum if the market finds no signs that the promises will become credible fiscal targets and viable reforms. Anthony Kettle, senior emerging-markets portfolio manager at RBC BlueBay, told Bloomberg that investors would probably give Bolsonaro the benefit of the doubt for now, but that the gains would need to be sustained by fiscal results. Natalia Gurushina of VanEck said in the same report that investors would soon be looking for concrete evidence and legislative progress.
The composition of Congress is also part of the outlook. Bloomberg noted that conservative candidates’ gains could make it easier for Bolsonaro to pursue his agenda if he wins, or limit some decisions with fiscal costs if Lula manages to turn the race around. That potential effect will depend on the alliances and legislative support each candidate secures; it does not guarantee that reforms will be approved.
For now, markets have responded to a political possibility, not to a confirmed change in economic policy. Attention is turning to the runoff, signals about Bolsonaro’s economic team, and, above all, the details of a fiscal plan that has yet to be fully defined.
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