Brazilian Real: Lula’s return brings post-election risks into focus – Commerzbank

BRL fell about 10% towards 5.50 per Dollar, Commerzbank’s Volkmar Baur reports. Brazil’s election result surprised markets as Lula won the run-off. High debt and a large deficit leave Lula with limited fiscal room, Baur stresses. For the Brazilian Real, he argues, the decisive factor will be how quickly Lula persuades investors that his pledges on reform and fiscal consolidation are credible.

Real outlook hinges on fiscal credibility

"Brazil’s election result caught markets on the wrong foot. While the first round had raised hopes of a change in power, Ignacio Lula da Silva (“Lula”) ultimately prevailed in yesterday’s run-off and will return to the presidency."

"The real reacted sharply. Having strengthened after the first round, BRL dropped around 10% towards 5.50 against the dollar in thin Asian trading."

"As my colleague Norman pointed out last week, attention will now quickly shift to fiscal policy. With public debt at 83% of GDP and a budget deficit of around 10%, Lula has little room to disappoint."

"He has promised fiscal consolidation in recent weeks, partly in response to market pressure. Now he needs to deliver. That will not be easy, particularly as he faces a more conservative Congress following the parliamentary elections in early October."

"The initial sell-off may well have been exaggerated, but that does not mean it will reverse immediately. Markets had been positioned for a Bolsonaro victory and the associated reform agenda, and such positioning can unwind quickly. "

"For the real, the crucial question is therefore how quickly Lula can convince investors that his reform pledges are credible."

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