Overview
Markets in Brazil rallied this week after Flavio Bolsonaro’s unexpectedly strong showing in the first round of the presidential elections. The Bovespa index jumped 7.7% on Monday to a new closing record, the real (BRL) appreciated more than 4% against the US dollar, and internationally traded shares of Brazilian companies soared. The bullish reaction to Sunday’s election results were largely driven by expectations that Flavio Bolsonaro, the son of imprisoned former president Jair Bolsonaro, will have the leg up in the October 25 runoff by winning voters from the other conservative candidates that are now eliminated.
Incumbent Luiz Inacio Lula da Silva (Lula) admitted that the results were unexpected, launching a more aggressive campaign strategy to attempt to win votes from the 21% of Brazilians who abstained in the first round. However, the right’s victories in gubernatorial and congressional elections on Sunday point to a broader conservative shift, which would also strengthen Flavio Bolsonaro’s mandate to govern if he is elected. As a result, markets have begun to price in the likelihood of a Bolsonaro presidency in 2027. In this scenario, planned fiscal reforms and a business-friendly policy approach would benefit Brazilian equities and the BRL. Bolsonaro would also align Brazil with the Trump administration on regional security policy and seek to open Brazil’s critical minerals sector to US investment, while balancing strategic economic ties with China, Brazil’s largest trade partner.
Conservative Gains in Congress
Beyond the presidential first round vote on Sunday, all 513 seats in Brazil’s Chamber of Deputies (lower house) and two thirds of the seats in the Senate were up for grabs. Lula’s Workers’ Party (PT) maintained its share of Senate seats and a bloc led by the PT gained six seats in the Chamber of Deputies. Bolsonaro’s Liberal Party (PL) increased its share of seats in the Senate from 15 to 28 (out of 81) and grew its share in the Chamber of Deputies from 98 to 121. These gains came at the expense of the Centrão, a loose centrist bloc that traditionally holds the keys to legislative power. Since Monday, centrist senators like Ciro Nogueira have moved to support Flavio Bolsonaro.
With Jair Bolsonaro serving a 27-year prison sentence for an attempted coup in 2023, the political movement he founded is being carried forward not just by his son Flavio, but by a growing dynasty of Bolsonaros winning political power. His wife Michelle won a Senate race in the capital Brasilia, and his second son Carlos won one of two available Senate seats in Santa Catarina. Bolsonaro’s youngest son Jair Renan and his brother Renato also won seats in the Chamber of Deputies.
Overall, conservatives have won a historic majority in Congress with 49 of the 81 members of the Senate now held by the far-right or center-right. This gives Flavio Bolsonaro a strong ability to govern if he is victorious in the runoff. With the momentum behind him, only a massive scandal could shift the dynamic in favor of Lula. Even if Lula manages to beat the odds on October 25, he would struggle to implement his agenda in what would be his fourth term in office.
Political Implications of a Bolsonaro Victory
A Bolsonaro victory in the runoff would have immense domestic, regional and international consequences. On the domestic level, Flavio Bolsonaro has vowed to achieve amnesty for his father, who refused to leave office after his electoral loss in 2022, as well as hundreds of protesters who were convicted after storming government buildings in Brasilia on January 8, 2023 (the Brazilian equivalent to January 6 in the US). Bolsonaro would also target political opponents such as Supreme Court Justice Alexandre de Moraes, the judge who presided over Jair Bolsonaro’s trial. Impeachment of Justices requires a two-thirds majority (54 votes) in the Senate, but support for such a measure has increased after Moraes was implicated in the explosive Banco Master scandal that has reached both sides of the political spectrum, including the Bolsonaros and multiple sitting Supreme Court Justices, throwing the Court into turmoil. With a Senate majority, Bolsonaro would already be able to appoint four Justices, since one of the 11 seats on the Court remains vacant after Lula’s nominee was rejected by the Senate, and three justices are due to retire. Impeachment proceedings could open up additional seats.
Regionally, a Bolsonaro victory would make Brazil the latest Latin American country to align with the Trump administration amid a historic right-wing shift that has been largely driven by voters’ concerns around crime. Bolsonaro has taken inspiration from El Salvador's Nayib Bukele and other regional leaders by proposing the construction of 5 mega-prisons in Brazil and stricter criminal penalties. While US President Donald Trump did not explicitly make any endorsement in the race, Flavio Bolsonaro’s recent visit to the White House, US sanctions on Moraes (later removed) and US designations of Brazilian gangs as Foreign Terrorist Organizations (FTOs) spoke for themselves. Lula, meanwhile, made Brazilian sovereignty a centerpiece of his campaign in the face of US tariffs and broader US military involvement in the region, declaring that Brazil is “nobody’s backyard.” Flavio Bolsnaro has vowed to make Brazil a member of the US-led Shield of the Americas security coalition, which would consolidate South America’s alignment with the US and leave Mexico as the only major Latin American country on the left.
A Bolsonaro victory would also reshuffle Brazil's geopolitical role in the context of climate change, multilateral institutions and leadership of the Global South. Lula gave the opening address at the United Nations General Assembly last month, defending multilateralism and climate protection. Brazil hosted COP30 last year in the Amazon region, one of the world's largest carbon sinks which saw heightened levels of deforestation during Jair Bolsonaro’s presidency. Brazil’s international influence also extends through its role as a founding member of BRICS, but Flavio Bolsonaro has suggested reconsidering Brazil’s membership. Since the first Trump administration, the US has adopted a more aggressive approach to counter Chinese influence in the Western Hemisphere. However, despite Latin American leaders like Ecuador’s Daniel Noboa, Argentina’s Javier Milei, Chile’s Jose Antonio Kast, and Peru’s Keiko Fujimori embracing US cooperation on regional security, they have refrained from severing economic ties with China. Noboa even visited Beijing in August to strengthen trade and secure mining and infrastructure investments. China is Brazil’s largest trading partner, and Flavio Bolsonaro as president would likely prioritize Brazilian economic interests by preserving these economic ties, while focusing on political and counternarcotics cooperation with the US.
Financial Outlook and Business Risks
Market optimism in Brazil this week was largely driven by expectations of fiscal reforms in a Bolsonaro victory scenario. Brazil’s nominal public-sector deficit has reached nearly 10% of GDP and the general government gross debt (DBGG) to GDP ratio hit 82.9% last month, a multiyear high. Bolsonaro’s proposed reforms include privatization and asset sales, tighter spending rules and a review of tax breaks, aiming to deliver a fiscal adjustment worth 1.5% of GDP over 18 months. This scenario will benefit Brazilian equities, interest rates and the BRL, but may not be sufficient to immediately stabilize debt. Discretionary spending makes up less than 2% of GDP, while a primary surplus of estimated 4% to 6% of GDP would be needed to stabilize the debt, meaning that Brazil’s deficit could still continue to widen in the short term but may stabilize in the medium term if reforms can generate a primary surplus over time.
A Bolsonaro presidency would be friendlier overall to extractive industries. While Bolsonaro pledged to end illegal deforestation by 2029, Lula’s proposal aims to achieve net zero deforestation by 2030. Critical minerals are also in play after the US recently invested $750 million in the Pela Ema project to secure rare-earth elements in partnership with Brazil’s Serra Verde. The deal, announced August 24 by the US Department of War, includes a $565 million loan through the Development Finance Corporation and the option for the US government to take a minority stake. Lula has tried to block such acquisitions, and a bill passed on September 2 established new rules for critical minerals projects. Lula’s regulatory approach stands in stark contrast to that of Flavio Bolsonaro, who has offered the US access to Brazil’s rare earth supply and posed Brazil as an alternative to China for critical mineral supply chains.
With Flavio Bolsonaro now favored to win the runoff, the prospect of pro-business reforms creates potential upside for equities that have until recently underperformed. The new makeup of Congress would give Bolsonaro a greater ability to push forward his agenda, but the harsh realities of Brazil’s current fiscal situation may produce some disappointment to the extent that expectations for short-term solutions may be unrealistic. Finally, the possibility remains that a bombshell revelation could turn the political tides of the race, as has happened throughout the summer as top figures on all sides of Brazil’s political establishment have been tied to a corruption scandal that is far from over.
