Morgan Stanley believes that financial markets are not adequately pricing in the risks associated with the upcoming Brazilian elections scheduled for October 4th. The bank's main concern is a pessimistic scenario where an insufficient fiscal response post-election could trigger a more severe economic adjustment than anticipated by the market consensus. This is highlighted by significant differences in economic platforms between the leading candidates, Lula, who advocates for maintaining the current fiscal framework and an active state role, and Flávio Bolsonaro, who proposes stricter fiscal rules, debt reduction, privatizations, and increased trade openness.
Historically, the Brazilian real has served as a key indicator of electoral risk. However, Morgan Stanley suggests that the current high carry trade could offer more support to the currency this election cycle, potentially shifting some of the adjustment to local interest rates. The bank outlines a wide range of potential outcomes: in a pessimistic scenario, the exchange rate could reach R$6.00, with DI futures for January 2029 at 16.50% and NTN-F yields for 2037 at 18%. Conversely, an optimistic scenario projects the exchange rate at R$4.50, with DI futures at 11% and NTN-F yields at 12%. Their base case, a 50/50 mix of optimistic and pessimistic scenarios, forecasts an exchange rate of R$5.25, DI futures at 13.75%, and NTN-F yields at 15%. The bank notes that risks are modestly skewed towards the pessimistic outcome.
Economists and market participants generally express skepticism about significant fiscal adjustments regardless of the election winner. The consensus suggests that Brazil's debt will likely continue to rise. Stabilizing the debt by 2031 would require a fiscal effort of at least 2.5% of GDP, or approximately R$350 billion, an amount deemed difficult to achieve given Brazil's rigid budget and fragmented Congress. The market is already pricing in some level of fiscal adjustment as inevitable, but the debate centers on whether these will be structural changes or temporary fixes. Foreign investors have shown some caution, withdrawing $4.2 billion from Brazilian equity and fixed-income portfolios between March and June, after significant inflows earlier in the year. The credibility of the fiscal regime post-election will be crucial in shaping expectations for debt, interest rates, and the currency. The market is focused on how robust initial fiscal measures will be to convince investors of sustained action, with some believing that economic constraints will ultimately dictate policy more than the ideology of the victor. bloomberglinea.com.br diariodocomercio.com.br
