Regardless of whether incumbent President Luiz Inácio Lula da Silva or opposition candidate Flávio Bolsonaro emerges victorious in Sunday’s runoff, the incoming president will encounter considerable economic hurdles by 2027. With a population of 214 million and a nominal GDP of US$4.1 trillion, Brazil ranks as the second-most populous nation in the Americas and holds the position of the continent’s second-largest economy, following the United States in both metrics. It is additionally a participant in the G20 and serves as the de facto leader of the South American Mercosur bloc. Its election is consequently under intense scrutiny globally, especially in Argentina, a significant trading partner of Brazil. According to the analysts, the incoming officeholder on January 5 will need to navigate the delicate balance between alleviating the government’s fiscal pressures and the potential threat of decelerating economic growth. Honorio Zabaleta informed that Brazil’s economy is approaching the runoff with “resilience,” although it is “gradually losing some momentum.” Official data indicates that GDP experienced a quarter-on-quarter growth of 0.5% and a year-on-year increase of 2% in the second quarter.
Meanwhile, the IBC-Br, a monthly economic activity indicator published by Brazil’s Central Bank, experienced a modest increase of 0.3% in August following declines in both June and July. The figures indicate a deceleration following a period of robust growth at the beginning of the year. Zabaleta noted that the unemployment rate stands at 5.3%, down from 5.6% a year earlier, while real wages are rising. However, he stated, “the latest data point to a slowdown, particularly in consumption.” And “This makes sense in a context of very high real interest rates,” the economist added. Brazil’s benchmark interest rate, the Selic, is currently at 13.75%, whereas consumer price inflation, as indicated by the official IPCA index, recorded a year-on-year rate of 4.2% in August. Federico Vaccarezza informed that the elevated interest rates are drawing significant capital inflows. However, he stressed that they also have a significant downside. “These high interest rates are generating very high levels of household debt,” Vaccarezza said. He identified high household indebtedness as a contributing factor to Lula’s lacklustre performance in the first round on October 5.
In May, Lula broadened the scope of the Desenrola Brasil program, originally established to assist households in renegotiating their debts and tackling the nation’s elevated default rate. Defaults have attained an unprecedented level of 6.6% among loans that lack government subsidies. The most significant challenge confronting Brazil’s economy, however, lies in its fiscal position. For Zabaleta, this is the regional powerhouse’s “Achilles’ heel.” He explained that while primary revenues and expenditures – excluding interest payments on government debt – are “more or less in order,” including debt-servicing costs reveals the scale of the problem. He emphasised that interest payments create a “significant hole” in the Lula administration’s accounts, with the fiscal deficit approaching approximately 9% of GDP. Brazil’s Central Bank reports that gross general government debt has reached 82.9% of GDP. The figure is even higher under alternative methodologies. Argentine broking Portfolio Personal Inversiones noted in a recent report that the ratio increases to 97% of GDP according to the IMF’s methodology. Gustavo Pérego, director of consulting firm ABECEB, stated that the incoming administration will need to confront the deficit, which he deems “already unsustainable,” even though there are limited resources at their disposal to address it. Approximately 88% of Brazil’s public spending is “automatic,” he explained.
In alignment with that evaluation, Zabaleta emphasised that the foremost objective for either Lula or Bolsonaro ought to be the formulation of a credible fiscal strategy aimed at stabilising public debt and mitigating uncertainty. He posits that Lula would likely prioritise stricter spending controls while maintaining social programs and public investment; however, he noted that persuading investors of his dedication to fiscal discipline may prove challenging. In contrast, Bolsonaro is “more likely” to pursue an agenda focused on enhanced fiscal discipline, reductions in spending, privatisations, and structural reforms, according to Zabaleta. Regardless of the outcome, Zabaleta anticipates that fiscal restraint will impede economic growth in 2027. “Market consensus forecasts growth of 1.8% this year and 1.3% next year,” he said. Vaccarezza said he does not expect any substantial change in economic policy if Lula wins reelection. If Bolsonaro wins, however, “the focus will be on reducing government spending.” He nevertheless pointed to a key challenge: “He will cut public spending and seek to narrow the deficit, but he will have to strike a balance between reducing spending and keeping the economy growing.” For an economy the size of Brazil’s, he argued, annual growth needs to reach around 3% to ensure a “sustainable pace of development over time.”
For that reason, he suggested that Bolsonaro might reduce public spending in the initial two years of his administration prior to attempting to “boost growth again.” Pérego, meanwhile, stated that to control expenditures, a government led by the Liberal Party candidate would need to modify the formula employed to adjust the minimum wage, ensuring that increases do not exceed inflation rates. The same would apply to pensions and spending on healthcare and education, he stated. Such measures would be implemented at a juncture when inflation has surpassed 5% annually, exceeding the government’s own target. He also suggested that stronger exports next year could contribute to sustaining economic growth. However, prices for Brazil’s primary commodity exports, including soybeans and oil, must stay near current levels. Potential weather-related disruptions, such as the El Niño phenomenon, which has been particularly strong this season, could pose an additional risk. Vaccarezza contended that, in contrast to Argentina, Brazil’s foundational economic discourse has reached a conclusion: “The fundamental economic model is not going to change.” And “Sometimes it may be a little more orthodox, sometimes a little more social-democratic, but the model is established, both in economic terms and in terms of foreign relations,” he added.
Pérego stated that should Lula secure reelection, he would need to navigate governance with what Pérego characterised as the most right-leaning Congress Brazil has encountered since 1998. “It would be very difficult for Lula to govern in a new term because, first, he would face the immediate economic challenges of running the government and, second, he would have a Congress working against him, regardless of whether his proposals were good or bad,” he argued. Jair Bolsonaro’s son, by contrast, would likely have greater room to govern, Pérego said, “at least during the first stage of his administration.” However, he cautioned that “no one has a blank check.” With 88% of the budget allocated to fixed expenditures, the remaining 12% is distributed nearly equally between the Executive and Legislative branches. This provides Congress with a level of “budgetary autonomy” that enables it to establish its own agenda, independent of the individual residing in the presidential palace in Brasília.
