Overview
Brazil reelected President Luiz Inácio Lula da Silva on Sunday to a fourth term in a historic political comeback that halted Latin America’s streak of right-wing election wins. His opponent, Flávio Bolsonaro, had outperformed expectations in the first round of voting on October 4, prompting Lula to launch an aggressive push of campaigning that won him around ten million more votes in Sunday’s runoff than he received in the first round. Despite Bolsonaro's initial calls to annul the election results over alleged irregular court rulings, Bolsonaro's Liberal Party subsequently acknowledged Lula's victory and there will likely be no repeat of the unrest that followed the 2022 election. Lula’s challenge will now be to govern with a conservative majority in Congress while seeking to address the country’s precarious fiscal position. Downside risks include political chaos in the short term, including potential US sanctions on government officials after Flávio Bolsonaro fled Brazil and was granted a visa to enter the US. Upside risks include a potential market correction in the medium-to-long term.
Brazilian Markets Tumble amid Fiscal Concerns
Markets reacted dramatically to Sunday’s election results. The Brazilian real fell almost 8% against the US dollar on Monday, the largest single day drop in decades, as equities in São Paolo and international stocks with exposure to Brazil were sold off by investors. Citigroup and BCA Research both downgraded Brazilian assets, citing a weaker risk-reward outlook for equities, bonds and currency. Bolsonaro’s first-round victory had sent markets soaring, pricing in his anticipated fiscal reform agenda to address the country’s economic woes. Brazil’s public debt-to-GDP ratio hit 82.9% in August, up more than 10% from the start of Lula’s third term, while the nominal public-sector deficit reached nearly 10% of GDP in the 12 months through June. Interest costs over the preceding 12 months totaled R$1.16 trillion, or 8.8% of GDP. Economic growth is also decelerating; the Brazilian economy grew 3.4% in 2024 and 2.3% in 2025, while growth for 2026 is forecast around just 2%.
The lack of confidence reflected by the adverse market reaction stems in large part from the ambiguity around Lula’s fiscal agenda. During the campaign, he promised expanded social programs including higher welfare payments, free public transportation on weekends and holidays, debt forgiveness for small businesses, subsidies for taxi drivers, and free weight loss injections. Lula also proposed an amendment to shorten the six-day work week to five days with no reduction in pay, which was approved by Brazil’s Congress earlier this month. These proposals were widely seen as last-minute campaign giveaways to win over voters, raising concerns around runaway public spending. It is unclear if the campaign pledges will be realized.
Questions Remain around Lula’s Economic Agenda
Now that he has secured a fourth term, Lula will have no choice but to confront Brazil’s fiscal reality. His previous successor, Dilma Rousseff, who was president following Lula’s second term, was impeached in 2016 for alleged administrative maneuvering to hide the scale of the deficit. This traumatic event in Brazil’s modern political history serves as an example of the dangers of fiscal neglect. Debt has become a political ticking time bomb in Brazil and around the world. To address these concerns, Brazilian Finance Minister Dario Durigan gave an interview on Monday, stating that the government will send legislation to Congress this year requiring lawmakers to target the primary balance goal. He also said that next year the government will aim for a higher effective primary surplus.
However, the slow rate of fiscal consolidation has resulted in investors demanding higher premiums to hold Brazilian debt. Yields on 10-year government bonds jumped by over 2.4 percentage points immediately after Lula’s victory, reaching a decade-high of 15.45%. The Brazilian National Treasury intervened in the bond market on Monday by canceling scheduled debt auctions and conducting a buyback of around US$1.3 billion of fixed-rate bonds. Despite these short-term stabilizing measures, there remains significant uncertainty around Lula’s long-term fiscal agenda. Speculation around the appointment of Vice President Geraldo Alckmin as finance minister suggests a potential shift toward fiscal orthodoxy. Alckmin, a former Lula rival, is seen as a technocratic, pro-market candidate for the position. Lula’s former finance minister Fernando Haddad, a member of Lula’s Workers’ Party (PT), stepped down to run for governor of São Paolo in this year’s elections. After conservative candidates swept to victory in Congressional races earlier this month, Lula will also have to win support from the centrist Centrão bloc to implement reforms.
Global Implications of Lula 4.0
US President Donald Trump responded to the results in Brazil by saying it “looked like another rigged election.” While Trump did not publicly endorse either candidate, perceived foreign influence became a central campaign issue, ultimately benefiting Lula, who provoked a rally-around-the-flag effect by framing himself as the defender of Brazilian sovereignty. One of his most effective campaign messages, “Brazil is nobody’s backyard,” especially resonated in the context of an increasing US presence across the Western Hemisphere. While Lula’s victory is likely to cause some continued tensions with the Trump administration, including an ongoing tariff dispute and diplomatic feud over the approval of the US ambassador, Lula will also probably take a pragmatic approach to managing ties with the US, as he has done with previous US administrations.
Lula’s victory prevents a broad alignment of South America with the US counternarcotics agenda. Security was central to the campaign, and Bolsonaro had said that he would have supported Brazil joining the Shield of the Americas coalition and the construction of Bukele-style mega-prisons. Lula is not in favor of these proposals, although he has made concessions on security as Brazil struggles to contain transnational criminal groups like the Comando Vermelho (CV) and the Primeiro Comando da Capital (PCC). In addition to supporting a lower age limit for criminal prosecution of certain violent crimes, Lula also plans to create a minister for public security position and appoint a new defense minister after the planned retirement of José Múcio Monteiro Filho. However, diplomatic tensions between Lula and the Trump administration may hinder regional security cooperation. Last month both the US and Brazil withheld the visas of each other’s law enforcement officials, hampering efforts to combat transnational crime.
The risk of increased US sanctions on Brazil is high. The Office of Foreign Assets Control (OFAC) has expanded its Transnational Criminal Organizations (TCO) Sanctions Program, and the State Department designated the CV and PCC as Foreign Terrorist Organizations this year. New sanctions against Brazilian government officials are also possible. On Monday, Supreme Court Justice Alexandre de Moraes, who led the prosecution of Jair Bolsonaro, ordered the seizure of Flávio Bolsonaro’s passport. Bolsonaro denied planning to flee the country, but on Tuesday reportedly boarded a flight to Florida. His brother Eduardo Bolsonaro, who lives in Texas and is close with the Trump administration, lobbied for the 2025 Global Magnitsky Act sanctions on Moraes.
The US sanctioned Moraes in 2025 but lifted those sanctions after Jair Bolsonaro was convicted. The US has also revoked visas of Brazilian officials, including Ambassador Maria Luiza Ribeiro Viotti. Especially in light of a blocking statute issued last year by Brazil’s Supreme Court following the designation of Moraes, US companies in Brazil and other companies with US exposure risk facing a compliance dilemma if Brazilian officials are designated by the US. This is because, under US law, companies would be barred from transacting with designated individuals who may play roles in regulatory or commercial areas that affect their business. Expanded sanctions on transnational criminal organizations also create secondary exposure risks due to their penetration of mainstream supply chains.
Lula will continue to position Brazil as an influential global player through BRICS and maintain ties with China, Brazil’s largest trading partner. Chinese President Xi Jinping congratulated Lula on Tuesday, pledging to expand bilateral cooperation. Brazil is a key source of critical minerals, and under a Bolsonaro presidency, Brazil would have sought to position itself as a target for US critical mineral investment and an alternative to Chinese supply chains. Lula, on the other hand, seeks to expand regulatory oversight and domestic processing of minerals through the recently passed Critical Minerals Law, although it remains to be seen how this new law will be implemented. Lula’s victory also reaffirms Brazil’s role as a leader on climate protections. Brazil hosted COP30 last year in the Amazon region, where Lula has implemented comprehensive conservation policies to curb deforestation.
While the volatility of Brazilian markets, which were primed for a Bolsonaro victory, reflect the widely unexpected nature of Sunday’s results, there are also potential upside risks for market recovery. Lula may not implement sweeping fiscal reforms to the extent that investors expected from Bolsonaro, but he will be obliged to address the current economic situation. With Congress controlled by right-leaning parties, he will also have to negotiate with the nominally centrist Centrão bloc to win support for proposed legislation. Despite the fiscal shortcomings of his third term, Lula presided over significant economic growth during his first two terms and will seek to shape a strong economic legacy during his final mandate.
