Brazil's Election: Divergent Politics, Convergent Debt Trajectory
Analysis shows Brazil's debt will likely keep rising under either presidential candidate, with fiscal reforms seen as difficult and insufficient.
As Brazil heads into its October presidential election, voters face a clear ideological choice between leftist incumbent Luiz Inácio Lula da Silva and challenger Flávio Bolsonaro. However, for investors and economists, the fiscal outlook appears strikingly similar under both candidates, with government debt projected to continue its upward climb regardless of the winner.
Analysts at TS Lombard estimate that under Lula's proposed reforms, gross debt would peak at 94.7% of GDP by 2034. A faster adjustment under Bolsonaro, including a proposed debt-linked spending rule, would still see debt peak at 90% of GDP in 2032. These projections underscore a growing skepticism in financial markets about the feasibility of a credible fiscal turnaround.
Barclays chief Brazil economist Roberto Secemski calculates that stabilizing the debt by 2031 would require a fiscal effort of at least 2.5 percentage points of GDP, roughly 350 billion reais. However, he notes that achieving such a scale of adjustment is highly unlikely given Brazil's rigid budget structure and fragmented Congress, which will also see all 513 lower-house seats and 54 of 81 Senate seats contested.
The structural challenges are formidable. Mandatory spending absorbs nearly 92% of primary outlays, leaving discretionary expenditure at just about 2% of GDP. This leaves little room for easy cuts, with any lasting adjustment needing to address politically sensitive areas like pensions, payrolls, and social benefits. As Secemski puts it, there are virtually no 'low hanging fruits' in the fiscal effort ahead.
Despite these concerns, the Brazilian real has remained resilient, up 5.8% against the dollar this year and nearly 20% stronger since the end of 2024. A benchmark interest rate of 14% against annual inflation of 4.44% continues to attract carry trades, providing a buffer for the currency. However, this support is narrowing, with non-residents pulling $4.2 billion from Brazilian portfolios between March and June.
The high interest rates have also taken a toll on the domestic economy, leading to spikes in corporate bankruptcies and household indebtedness. This raises the risk of a sharper slowdown if an external shock were to hit. As PIMCO's Pramol Dhawan notes, without restored fiscal credibility, Brazil will lack the conditions for a sustainable decline in interest rates, deepening pressure on growth and debt. The only question, he adds, is whether the adjustment happens proactively or is ultimately imposed by market forces.