Investor sentiment toward Brazil’s fiscal trajectory remains cautious ahead of the October presidential election, with analysts questioning whether either Luiz Inácio Lula da Silva or Flávio Bolsonaro can deliver the required fiscal consolidation.
The nominal budget deficit widened to 9.99% of GDP in the 12 months through June, while gross government debt rose to 81.9% of GDP, an increase of 3.3 percentage points in the first half of 2026. Barclays’ chief Brazil economist Roberto Secemski estimates that stabilizing debt by 2031 would require a fiscal effort of at least 2.5 percentage points of GDP—approximately R$ 350 billion—calling such an adjustment "highly unlikely" under either candidate.
The composition of Brazil’s 2026 budget offers limited flexibility, with 92% of primary expenditures classified as mandatory and discretionary spending equivalent to just 2% of GDP. TS Lombard projects debt peaking at 94.7% of GDP in 2034 under a reform scenario, while a Flávio Bolsonaro-led administration could see debt peak at 90% of GDP by 2032.
Market reactions have been mixed. The Brazilian real has strengthened 5.8% against the dollar this year and is nearly 20% stronger since December 2024, supported by a 14% Selic rate and annual inflation of 4.44%. However, foreign investors withdrew $4.2 billion from Brazilian equities and fixed-income portfolios between March and June after injecting $18.8 billion in January and February, according to Institute of International Finance data.
Analysts highlight the structural challenges. Marcelo Kalim, CEO of C6 digital bank, noted that while Flávio Bolsonaro may exhibit greater willingness to adjust fiscal policy, concrete measures would only become clear once in office. Pramol Dhawan of PIMCO added that the key question is whether any adjustment occurs proactively or is imposed by market forces.
Focus Economics survey respondents expect the Selic rate to end 2026 at 13.75% and decline to 12% in 2027, reflecting lingering concerns over fiscal discipline and inflation dynamics.
