Morgan Stanley has characterized Brazil's upcoming elections as a binary event, warning that fiscal risks are underappreciated by consensus forecasts. In a report published Tuesday, economists Ana Madeira and Thiago Machado outlined three macroeconomic scenarios through 2035, with the trajectory of public debt and monetary policy dependent on the outcome of the October vote.
The bank projects the Ibovespa could range between 130,000 and 250,000 points by mid-2027, with a base-case target of 215,000 points—implying a 28% gain in reais and 27% in dollars from the current level of 167,927. A worst-case scenario could see a 25% decline in reais or 35% in dollars, accompanied by a P/E contraction to 6.1x. The bank’s Barra strategy portfolio allocates 35% to 40% to defensive exporters with dollar revenues and around 30% to higher-beta financials.
Fiscal dynamics remain the central concern. Compulsory federal spending now exceeds 91% of total outlays, while the tax burden has risen by 1.5 percentage points of GDP since 2022, reaching its highest level since June 2008. The spending ceiling, introduced in 2016 with only 2.5% of expenses outside its limits, now includes 10.8% of total spending, according to National Treasury data. The nominal deficit reached 7.9% of GDP in June, and gross debt is expected to close 2026 at 82.8% of GDP.
Morgan Stanley’s scenarios diverge from consensus expectations. In a pessimistic case, GDP growth stagnates at 0.2%, the Selic rate climbs to 15.50%, the USD/BRL exchange rate reaches R$6.00, and gross debt exceeds 100% of GDP by 2033, peaking at 106% in 2035. An optimistic scenario assumes 1.5% GDP growth, a Selic rate of 9.75%, an exchange rate of R$4.50, and debt stabilizing at 86.2% of GDP by 2028. The base case projects a Selic rate of 11%, an exchange rate of R$5.25, and debt rising to 93.6% of GDP by 2035.
The report highlights the limited scope for fiscal adjustment, noting that the central bank’s room to ease policy is constrained by persistent inflation and weak growth. The economists warn that gradual implementation of fiscal measures does not imply ambiguity over the final outcome, signaling that delays could amplify risks. Return to investment-grade status is viewed as unlikely before 2028, with 2029 as a more plausible target even in the optimistic scenario.
Polling data released ahead of the October 4 legislative elections and October 25 presidential runoff shows President Luiz Inácio Lula da Silva leading with approximately 41% of first-round voting intentions, followed by Flávio Bolsonaro at 34%. A second-round simulation places Lula at 46% against Bolsonaro’s 42%. Legislative contests will determine all 513 seats in the Chamber of Deputies and 54 of 81 Senate seats, with right-wing parties leading in 16 state-level races, center parties in 13, and left-wing parties in four.
