Brazil votes: a coin-toss election and a fiscal bill that can’t wait

Brazil’s election will matter less than the next government’s ability to secure congressional support for a credible fiscal adjustment and reverse the debt spiral.

• Brazil votes on 4 October, with a presidential run-off on 25 October; current polling points to a statistical dead heat between Luiz Inácio Lula da Silva and Flávio Bolsonaro.
• The election also renews all 513 Chamber seats, 54 of 81 Senate seats and 27 governorships, while Brazil’s open-list system is expected to produce a fragmented Chamber in which the Centrão bloc remains pivotal.
• The economy is not in crisis: unemployment is near historic lows, the harvest is at record levels, external accounts are manageable, and Copom cut the Selic to 13.75% on 16 September after five consecutive 25-basis-point reductions.
• Public finances are deteriorating: gross government debt reached 82.5% of GDP in July, up 3.3 percentage points in the first half of the year, while accrued interest contributed 4.9 points and the 12-month nominal deficit reached 10% of GDP in June.
• With a policy rate of 13.8% and a real rate near 9%, high borrowing costs ration credit, delay corporate investment and weigh on retail, housing, autos and household finances; the primary deficit was still 1.2% of GDP and the interest bill around 8.8% of GDP.

Takeaway: Investors should monitor the congressional arithmetic as closely as the presidential result, because only a durable primary surplus, spending reform and structural changes can put debt on a declining path, lower the risk premium and allow deeper rate cuts.