Brazil’s Debt Tops 82% of GDP as Bovespa Falls 13.9% After Lula Victory
Key Facts
The Bovespa index fell 13.9% at the close on October 26, its biggest one-day decline since March 2020, while the real dropped more than 11% against the dollar in early spot trading, according to Reuters. The selloff followed the re-election of Luiz Inácio Lula da Silva, reversing bets that had supported Brazilian assets before the runoff. The decline turned into a direct disruption to trading, with the exchange halting activity for 30 minutes after the index lost 10% from its previous close. The Treasury also canceled bond auctions scheduled for the week. These moves came as public debt topped 82% of GDP, with limited room to adjust spending.
Brazilian stocks had risen about 7% from their level before the first round, while the real had strengthened about 5% against the dollar through October 23, as markets bet on a rightward political shift, according to Reuters via Investing.com. After Lula’s victory was announced, those assets fell sharply in the October 26 session. Bovespa closing data show the index stood at 176608.23 points that day, then closed at 175710.05 points on October 27. The index therefore did not rise in Tuesday’s session, but continued to fall between the two closes. Some of the gains made before the runoff were erased, as markets continued to assess the effect of the political result on the fiscal policy outlook.
Pressure on assets mounted as public debt expanded by more than 10 percentage points during Lula’s current term, to more than 82% of gross domestic product, according to Reuters. The agency traced the roots of this trajectory to years of rising mandatory spending. The adjustable share is no more than less than 8% of the federal budget, limiting the portion the government can rearrange. These fiscal figures put public finances at the center of investors’ assessment of the period ahead. Lula’s team had targeted a primary surplus, before interest payments, of about 1.3% of GDP by 2030 in an effort to curb borrowing, according to Reuters via Investing.com.
The Treasury canceled the inflation-linked bond auction scheduled for October 27, as well as the fixed-rate bond auction scheduled for October 29, according to Reuters. The decision came as markets fell in the wake of the election. The Bovespa’s decline had exceeded the 10% threshold from the previous close, prompting a half-hour trading halt before activity resumed. At the close, the index was down 13.9%, its biggest one-day percentage loss since March 2020. The real also fell more than 11% in early trading, according to the agency.
Markets are awaiting signals from the incoming administration on fiscal discipline and the makeup of its economic team. Graham Stock of RBC BlueBay said, "The key signal for markets will be the commitment of Lula’s incoming administration to fiscal discipline, starting with the appointment of a new finance minister in the coming weeks." An investment analyst at UBS also said investors want "a clear and credible commitment to fiscal discipline," while the firm’s analysts noted that any fiscal plan needs a working relationship with a Congress inclined toward opposition, because its passage requires congressional cooperation. In August, Brazil’s Monetary Policy Committee cut the Selic rate to 14.00% per year, according to the central bank. The committee was scheduled to meet on November 3 and 4, with minutes due to be published on November 10.