Key takeaways:
- Flávio Bolsonaro’s stronger-than-expected performance in first-round elections, alongside gains for the right and centre-right in Congress, points to a broader appetite for political change in Brazil and increases the probability of a more market-friendly policy direction.
- The immediate read-through is supportive for Brazilian assets, but electoral optimism alone will not transform the sovereign credit story. Fiscal credibility, structural reform and the next administration’s capacity to implement policy are crucial.
- Bottom-up fundamental research, including on-the-ground analysis, is central to assessing whether policy rhetoric translates into tangible action. Understanding the credibility, pace and delivery of reforms can help determine whether political change is translating into lasting improvements in Brazil’s credit fundamentals.
First-round surprise lead for Bolsonaro
Brazil’s first-round election delivered a stronger-than-expected result for Flávio Bolsonaro (the son of former president Jair Bolsonaro), who secured 47.03% of valid votes compared with 45.16% for incumbent Luiz Inácio Lula da Silva. Bolsonaro exceeded the poll-of-polls1 by more than four percentage points and led in the three largest electoral battlegrounds: São Paulo, Minas Gerais and Rio de Janeiro. The result points to a broader demand for political change rather than simply a consolidation of the traditional right-wing electorate. This matches a general turn to the right in the whole Latin America region and a stronger re-alignment with the US.
Second-round outlook – Advantage for Bolsonaro, but the race remains open
The second round of voting will take place on 25 October, with Bolsonaro now the favourite. He starts with a two-point lead and should capture a larger share of the remaining centre and centre-right vote. Prediction markets moved sharply following the result, with Bolsonaro’s implied probability of victory rising above 80%. Nevertheless, the election is not settled. The main variables will be the first run-off polls, candidate endorsements, rejection rates, debate performance, turnout and mobilisation of the 21.1% who abstained in the first round.
A rightward shift in Congress
The congressional result reinforces the rightward political shift. The Partido Liberal (PL or Liberal Party) became the largest individual party in the Federal Senate and is expected to be the largest bloc in the Chamber of Deputies, while the wider right and centre-right strengthened their legislative position. This would improve coalition-building and governability under a Bolsonaro presidency, although Brazil’s fragmented and transactional congressional system will likely remain an important constraint. Conversely, a Lula victory would leave the administration facing a materially more difficult legislative environment.
Policy expectations – fiscal credibility is the key test
The first-round result, in our view, increases the probability of a more market-friendly policy direction based on fiscal consolidation, economic reform and closer alignment with the US. However, detailed fiscal proposals remain limited, and neither campaign has yet provided sufficient clarity on the pace, composition or political implementation of adjustment. Fiscal credibility therefore remains the key medium-term variable: a disciplined framework could lower sovereign risk premia, improve debt dynamics and support capital inflows, but the market will ultimately require policy execution rather than electoral signalling. We believe there is potential for Brazil to stabilise its credit rating in the case of a Bolsonaro win but only expect to gain clarity when we have the final outcome of the second-round vote.
Is durable change on the horizon?
The potential for a more market-friendly policy direction could therefore improve Brazil’s credit trajectory, but electoral optimism ultimately needs to be validated by economic structural reform. On-the-ground research can help to distinguish whether rhetoric on policy is turning into structural reform and assess the political implementation capacity.
Market implications and next steps
The immediate read-through is clearly supportive for Brazilian assets, reflecting the higher probability of fiscal consolidation and structural reform. More details on policy and implementation plans are needed, and we will visit Brazil in November. The new government will not be in place by then, but we will meet with local political analysts close to the new government and local investors. Ultimately, to get a clearer picture of the political situation and whether electoral optimism has the potential to translate into durable improvement in Brazil’s credit story.
1 A poll of polls is an aggregate of several individual opinion polls rather than the result of one survey.
Sovereign debt securities are subject to the additional risk that, under some political, diplomatic, social or economic circumstances, some developing countries that issue lower quality debt securities may be unable or unwilling to make principal or interest payments as they come due.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.
Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.
Bottom-up fundamental research: The analysis of individual securities or issuers using financial, economic and other relevant information to assess their value and risks.
Candidate endorsements: Public declarations of support for one candidate by politicians or candidates who are no longer in the race.
Capital inflows: The movement of money into a country for investment, trade or business activity.
Credit fundamentals: The financial and economic factors used to assess a borrower’s creditworthiness and ability to meet its debt obligations.
Credit rating: An independent assessment of the creditworthiness of a borrower by a recognised agency such as Standard & Poors, Moody’s, or Fitch. Standardised scores such as ‘AAA’ (a high credit rating) or ‘B’ (a low credit rating) are used, although other agencies may present their ratings in different formats.
Debt dynamics: The way a borrower’s level of debt changes over time, influenced by factors including borrowing costs, economic growth, fiscal balances and inflation.
Fiscal consolidation: Measures taken by a government to reduce its budget deficit or stabilise its debt, generally through changes to public spending, taxation or both.
Fiscal credibility: The degree of confidence that a government can establish and implement a sustainable fiscal policy while meeting its financial commitments.
Mobilisation: How successfully a candidate encourages their supporters, particularly those who did not vote previously, to turn out and vote.
Prediction market: A market in which participants trade contracts whose value depends on the outcome of a future event, with market prices often interpreted as an indication of the perceived probability of that outcome. In an election context, prediction markets are markets where participants trade contracts based on who they think will win an election.
Rejection rates: The proportion of voters who say they would not vote for a particular candidate under any circumstances.
Run-off polls: Opinion polls taken ahead of the second round of voting, indicating which of the two remaining candidates voters currently favour.
Sovereign credit: Debt issued by a national government and the assessment of that government’s capacity and willingness to meet its financial obligations.
Sovereign risk premium: The additional return investors require for holding a country’s debt relative to an investment considered to have minimal risk, reflecting factors such as credit, political and economic risk.
Structural reform: A change to a country’s economic institutions, regulations or policies intended to improve the functioning and resilience of its economy.
Turnout: The proportion of eligible voters who actually cast a vote.