Brazilian Real faces volatility risks following Lula victory – Societe Generale

Gradual fiscal consolidation, unresolved debt concerns and interest rates staying higher for longer underpin Societe Generale’s Dev Ashish’s analysis of Brazil following Lula’s unexpected re-election victory over Flávio Bolsonaro. The note points to a shallower path of Selic rate cuts and difficulties governing with a more conservative Congress. Brazilian assets are likely to come under pressure as investors unwind positions taken in anticipation of a Bolsonaro win.

Brazilian assets face pressure as markets reassess election outcome

"Lula secured a surprise re-election victory, overturning a first-round deficit to defeat Flávio Bolsonaro 51.8%-48.2%, marking the first successful runoff comeback in Brazil's democratic era."

"Bolsonaro is challenging the result over the extension of voting hours, but a legal reversal appears unlikely. However, protests, judicial disputes and political tensions could persist."

"Governability will be challenging, as Lula faces a more conservative Congress that may constrain his legislative agenda while also limiting fiscal expansion."

"Fiscal consolidation is likely to remain gradual, leaving debt concerns unresolved and supporting a higher-for-longer interest-rate outlook."

"We expect a shallower easing cycle, with Selic ending 2027 at 12.25% and remaining above market expectations through 2028."

"Brazilian assets are likely to face immediate pressure and heightened near-term volatility as market unwinds positions built on expectations of a Bolsonaro victory."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)