Brazilian Real: Lula Victory Puts Volatility Risks in Focus – Societe Generale

Lula’s unexpected re-election win over Flávio Bolsonaro is the focus of an analysis by Societe Generale’s Dev Ashish. Brazilian assets are likely to come under pressure as investors unwind positions premised on a Bolsonaro victory, the note says. A more conservative Congress will complicate governability. The analysis also points to gradual fiscal consolidation and lingering debt concerns, with interest rates likely to stay higher for longer and the Selic easing cycle expected to be shallower.

Brazil’s Post-Election Market Reassessment

"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. Know more.)