By Mateo Bueno Sá
The British magazine The Economist says investors are fleeing Brazil after President Luiz Inácio Lula da Silva's runoff victory on October 25, and that the country risks heading toward a fiscal cliff. According to the magazine, the Brazilian real fell 8% against the dollar the day after the result, and the Ibovespa, Brazil's main stock index, closed down 14%. The story was amplified on X by the account @NewsLiberdade and detailed by Brazilian outlets.
Brazilian real and Ibovespa in free fall
According to The Economist's report, which the Brazilian newspaper Estadão published in translation, Lula won the October 25 runoff by almost four percentage points. He had finished behind Flávio Bolsonaro, son of former president Jair Bolsonaro, in the first round three weeks earlier. Lula, of the leftist Workers' Party (PT), will begin his fourth term in January.
Investors, however, reacted with panic. The magazine says the real's 8% drop against the dollar the day after the result was its worst single-day fall in more than 25 years. The Ibovespa closed down 14% after triggering a circuit breaker, a mechanism that limits sharp swings in the market.
The Brazilian website Aciara summarized the episode the same way: the re-election caused a strong negative market reaction, with the real falling 8% in a single day. Revista Oeste, a Brazilian conservative magazine, reproduced the article's headline: “Lula wins, investors flee and Brazil heads toward a fiscal cliff.”
Why investors are afraid
The Economist says investors wanted Flávio Bolsonaro to win largely because they trust Lula even less. According to the magazine, markets rightly fear economic stagnation and excessive spending that Brazil cannot afford.
The publication notes that successive governments, including Lula's, have spent without restraint. That forced the Central Bank to raise interest rates, and the real interest rate now stands at 9%. Brazil pays a larger share of its GDP in debt interest than almost all major countries. According to the magazine, this burden falls on investment, businesses and families, and it chokes growth.
The Economist's message to the government
The Economist argues that Lula, now 81, will have to make a sharp turn in economic policy to prevent the surge in the dollar from turning into a recession. The risk, according to the magazine, is that worsening finances will force the Central Bank to raise the benchmark interest rate.
The prescription it outlines is to convince investors that the government's fiscal stance will change, appoint a credible finance minister and push ahead with reforms to stabilize public debt. According to the magazine, Lula's final four years in office will have to be very different from the previous four if he wants to improve the lives of the poorest Brazilians and protect his legacy.
Background: why it matters
Lula was president from 2003 to 2010 and returned to office in 2023. Brazil's government is often referred to as the “Planalto,” after the presidential palace in Brasília. The country's high interest rates and public debt have long been a concern for investors, and the choice of finance minister is closely watched as a signal of the government's fiscal direction.
What comes next
Markets will closely watch the next moves: who is picked to run the Finance Ministry, what signal the government sends on spending control, and how the exchange rate and the stock market react in the following sessions. If confidence does not return, the Central Bank could come under pressure to act on interest rates.
VDD Analysis
When one of the world's most widely read magazines and the market itself point in the same direction, it is not political cheerleading but arithmetic. A government that spends more than it collects ends up sending the bill to citizens, in high interest rates, an expensive dollar and fewer jobs. It is up to the Planalto to prove with actions, not speeches, that its commitment to fiscal responsibility is real.
With information from estadao.com.br, aciara.com.br, Revista Oeste and the @NewsLiberdade profile on X.
