Regardless of who wins the election, Brazilian growth will slow sharply as the global recession sets in. Moreover, while potential growth would be stronger under Bolsonaro than Lula, neither candidate has a credible fiscal plan.

  • Despite a tightening in the polls, former left-wing president Lula still looks favorite to overcome incumbent Jair Bolsonaro in the race for Brazil’s top job, although he is unlikely to secure enough votes in Sunday’s first round to avoid a second round run-off (on 30th October). 

  • With Bolsonaro’s market friendly credentials fraying and Lula showing some signs of moderating, the result will not be as polarizing for the economy as some had initially assumed. 

  • Indeed, whoever wins the vote, Brazilian growth looks set to slow over coming years as the global recession hits. Fiscal policy may be loosened, particularly under Lula. But both candidates will be constrained to some extent by a need to maintain credibility in the markets. 

  • Meanwhile, neither candidate seems to have a strong desire to tamper with the BCB, which looks set to delay interest rate cuts while core inflation remains sticky.  

  • Looking to the medium term, while potential growth would be stronger under Bolsonaro than Lula, both may struggle to sustain fiscal discipline. 

  • Indeed, using fiscal policy as a political tool has long been a tactic of Lula and his PT party. But the run-up to this election has revealed Bolsonaro’s willingness to do the same.  

  • Fiscal dominance remains a (tail) risk – particularly under Lula. And without a credible fiscal anchor, risk premia on Brazilian assets is likely to remain high.  

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