Brazil’s currency plunged 8 per cent against the US dollar on Monday, while the country’s benchmark stock index fell 13.9 per cent, after President Luiz Inácio Lula da Silva secured a surprise re-election victory over right-wing challenger Flávio Bolsonaro, triggering a sharp reassessment of the country’s fiscal outlook.
The Brazilian real fell to R$5.41 against the dollar in a turbulent trading session following Sunday’s run-off vote. The Bovespa index in São Paulo briefly triggered an emergency trading halt before closing down 13.9 per cent, its worst daily performance since the market turmoil caused by the coronavirus pandemic in 2020. Expectations for long-term interest rates rose sharply, while yields on some domestic bonds climbed above 15 per cent.
The sell-off erased gains recorded since Bolsonaro, the opposition candidate who had led opinion polls, emerged from the first round of voting earlier this month with promises of pro-business policies. Investors had expected a change of government to improve the prospects of reducing Brazil’s budget deficit and easing pressure on interest rates.
Lula won 51.8 per cent of the vote, compared with 48.2 per cent for Bolsonaro, the 45-year-old son of jailed former president Jair Bolsonaro. The result surprised investors who had positioned themselves for an opposition victory and renewed efforts to bring public spending under control.
“The local market has sold off dramatically,” said Graham Stock, senior sovereign strategist at RBC BlueBay. “These are huge moves . . . It’s a clear message that fiscal adjustment is the priority.”
Lula, 80, campaigned on spending commitments that included free public transport at weekends, debt forgiveness for individuals and increased welfare payments. Critics accused him of offering costly benefits to secure votes, while investors fear the measures could make it more difficult to reduce the government’s deficit.
The International Monetary Fund has projected that Brazil’s fiscal deficit will amount to about 8 per cent of gross domestic product this year. Public debt stands at approximately 83 per cent of GDP, a relatively high level for an emerging economy, according to economists. Concerns over the country’s public finances have contributed to the central bank maintaining its policy interest rate at 13.75 per cent, increasing borrowing costs for businesses and households.
Jim Reid, head of global macro at Deutsche Bank, said the election result had wrong-footed investors who had increasingly priced in a Bolsonaro victory and expected a greater likelihood of fiscal consolidation.
Fred Nobre, a portfolio manager at Brazilian brokerage and investment firm Warren Brasil, described market sentiment as extremely poor, calling it the worst day for asset performance in many years.
Financial stocks bore some of the heaviest losses. An index tracking the sector fell 22 per cent, while investment bank BTG Pactual dropped 25 per cent. State-controlled Banco do Brasil lost 29 per cent and Bradesco fell 22 per cent. In US markets, shares in digital brokerage XP plunged 48 per cent, while fintech company Nubank declined 17 per cent.
The turmoil also spread to international markets. Yields on Brazil’s dollar-denominated bonds due in 2036 rose from 6.72 per cent to 6.94 per cent, while shares in Spain’s Banco Santander, which has a substantial Brazilian business, fell 3.1 per cent.
Analysts warned that sustained uncertainty over fiscal policy could keep borrowing costs high and weaken economic growth. Aldo Ruiz, an emerging markets equities analyst at Federated Hermes, said the real could continue to depreciate and growth remain constrained unless Lula provided greater clarity on the country’s public finances.
Lula will also face a conservative-dominated Congress, including lawmakers allied with Bolsonaro, potentially limiting his ability to implement his agenda. Investors are now watching for his choice of finance minister, with Stock saying the appointment would be central to demonstrating the administration’s intentions on fiscal policy.
Before the election, the real had gained 10 per cent against the dollar during the year, while Brazilian stocks had risen 38 per cent in dollar terms, making the market one of the world’s strongest performers.
