Brazil’s voters will go to the ballot box in October of this year to elect a new president. The choice is between the incumbent, Luiz Inácio Lula da Silva (simply known as Lula), an 80-year-old leader of the Workers Party who aims to win his fourth term (he reigned from 2003 to 2011 and since 2023), and Flávio Bolsonaro, a senator for Rio de Janeiro and son of disgraced former president Jair Bolsonaro (2019-2023), who like his father received the backing of Donald Trump. Initially, the election looked like a coin-flip with both candidates polling neck and neck. But scandals and fraud are never far away in Brazilian politics. Flávio plunged in the polls in June after it emerged that he had asked for money from Daniel Vorcaro, the fraudulent leader of Banco Master. The bank turned out to be a costly Ponzi scheme (Brazil’s deposit-insurance fund, FGC, may have to reimburse USD 11 billion in investor losses). In prediction markets Lula leads with over 60% of the vote whereas Bolsonaro is now stuck at the mid-20s. Conventional polls (like AtlasIntel, BTG Nexus and DataFolha) have Lula at a much narrower lead of 47% to 49% against Bolsonaro at 43%. Main talking points in the election are the economy (more precisely, voters’ spending power) and, like elsewhere in Latin America, crime.

Front-runner, presiding Bossa Nova style…

In this blog we focus on the economy, which is doing better than expected with real GDP growth reaching 2.3% last year. This year, growth is projected at 2.4% (IMF, WEO July), although this may prove optimistic (for example, the OECD’s economic outlook, published in June, projects 1.6%). Unemployment is at a historical low of 5.6% (May 2026). Inflation has been tamed by an orthodox central bank and declined from a peak of 12.1% after the covid-19 pandemic to 4.6% presently. The country runs a trade surplus of about 2.8% of GDP although the current account is in deficit at 2.5%. A significant part of the deficit is covered by foreign direct investments (1.9% of GDP) though. The real has strengthened since January 2025 (from 6.2/USD to 5.1/USD) after a very weak period in the 2nd half of 2024 (the Big Mac index suggests that the currency is still 24% undervalued against the dollar or 6% on a GDP-adjusted basis). Brazil’s economic prospects improved after the EU agreed to a trade agreement with Mercosur (“fast-track” as negotiations lasted only 25 years). The other big milestone is the new VAT, approved in 2023, which will come into effect from this year and be completed in 2033. The tax reform merges 5 taxes across 3 levels of government into a two-tiered VAT and excise (applicable to harmful products only). The general rate is equal to 28% but is 0% for most basic goods. Further, a cash-back mechanism for the poorest household will be implemented to partly reimburse VAT paid, making the tax less regressive. The new tax should reduce complexity and address distortions caused by the current system. The third driver for growth will be increased production of hydrocarbons (up 20% by 2030 to 5.2 million boepd) by developing new fields in equatorial margins located in the mouth of the Amazon River (it is not clear how this dovetails with the roadmap to phase out fossil fuels and whether new developments could end up as stranded assets).

The war in the Middle East has had little impact on the economy yet as Brazil benefits from being a net exporter of oil and having a massive sugar cane-based biofuels industry (the majority of light vehicles in Brazil have full fuel flexibility and can run 100% on ethanol whereas heavy vehicles run partly on biodiesel with mandatory blends of 30% for gasoline and 15% for diesel). Further, Brazil’s electricity system is dominated by renewables (hydro, solar, wind and biofuels: 88% in 2024 according to IEA), making it virtually immune for hydrocarbons prices, however instead drought may be a nonnegligible risk (hydro’s share in electricity production exceeds 50%). Vulnerability to the war is mostly related to imports of fertilizers (the Middle East accounts for 30% of Brazil’s urea imports and 10% of phosphate). Urea imports are down by about 60% (according to Rabobank), which should have a negative impact on crop yields, although Rabobank believes that this year’s harvest should be relatively stable. El Niño is expected to have a modest impact on crops in Brazil with oranges and coffee being most at risk.

Brazil is also at the receiving end of Donald Trump’s tariff frolics. Effective July 22nd, the USTR imposed a 25% tariff to retaliate against unfair trade practices (one has to do with PIX, Brazil’s successful payments platform, owned by the central bank, which USTR claims unfairly competes with Mastercard and Visa). Marco Rubio at behest of his boss said that Lula had not negotiated in good faith and accused him of putting his own ego ahead of making a good deal (something Rubio’s boss never does). However, as two-thirds of Brazilian exports (including coffee, pig iron and Embraer planes) to the U.S. are exempted to protect U.S. consumers, the new tariff amounts to not much. In addition, Brazil is one of 60 countries that incurs an additional 12.5% tariff after the USTR finalized an investigation into the use of forced labour in countries from which Brazil imports. The USTR investigations seem to suffer from severe AI slop (incoherent and inconsistent argumentation), so it is uncertain whether these new tariffs remain unchallenged. In any case, in 2025 the U.S. had a trade surplus with Brazil of USD 14.4 billion and this year (ytd to 31 May) already reached USD 7.8 billion (U.S. Census Bureau). The U.S. only accounts for about 11% of Brazil’s exports (2025). You start to wonder why Trump singled out Brazil. As so often with Trump’s actions, his disdain for Lula has resulted in political backfiring as Lula’s standing has been strengthened by Trump’s erratic tariff policies and Lula-bashing (foreign interference is not very popular amongst Brazilians).

The main problem for the Brazilian economy is its fiscal health. Even though the country runs a modest primary deficit of -0.4% this year (IMF), the fiscal deficit is expected to come in at -7.7% due to high interest rates. The central bank’s policy rate (SELIC) is 14.25% against inflation of 4.50%, leaving the real rate at an astronomical 9.75% (longer-term bonds trade at yields of 14.1% to 14.7%). IMF projects a slight improvement of the primary balance to +0.5% by 2030, clearly this is insufficient to stabilize debt, even when interest rates drop significantly. Gross government debt is set to increase from 96.5% of GDP in 2026 to 105.5% in 2030. We believe max 70% gross debt level would be appropriate for a country like Brazil (for comparison, Mexico’s gross debt level is 62.7% of GDP). Clearly, the primary surplus should be much higher to stabilize debt (for reference, the surplus was 1.4% in 2023 when Lula returned to power). The tax burden is already high at 33.7% of GDP compared to an average rate of 34.1% for OECD countries (Source: OECD, 2024 numbers; Mexico’s is 18.3%), although the tax system is highly distorting and inefficient. There are no easy options, other than cutting expenditure as inflating away the debt (never a good option as risk premiums will increase, making future debt much more expensive) is difficult as more than 25% of government debt is inflation-linked. Cutting expenditure is difficult as well because more than 90% of government spending is mandatory (i.e. stipulated by law) and most is index-linked (to minimum wages, for example). De-linking is one measure that could help to make debt more sustainable over time. The extremely generous public pension scheme (swallowing 13% of GDP or more than double the average of EM countries) should urgently be addressed, especially as Brazil’s population is aging fast. High government debt is also crowding out private investment, limiting Brazil’s growth potential as evidenced by the low investment rate of 17% of GDP. Given Brazil’s high FX reserves of USD 370 billion and the fact that nearly all debt is denominated in real and only 10% is held by non-residents, implies that Brazil has some time to address its debt problem but in the end the country is at the mercy of global markets (as we have witnessed in 2014-2016 and more recently in Q4 of 2024), mostly through currency depreciation. Unfortunately, changing the constitution, which is required to address the spending issues, is fiendishly difficult given vested interests in Congress (often referred to as the Centrão). As history shows, a severe crisis is probably required to focus the minds and get things done.

Average real monthly earnings are 8.6% higher than in 2019 (source: IBGE). Unfortunately for Lula, many voters will not thank him as they believe that the economy has gotten worse, only remembering high inflation and loss of real income after the covid-19 pandemic and ignoring the subsequent recovery (a phenomenon that we have seen elsewhere in the world). On crime, Lula has a weaker image than Bolsonaro, who has adopted his father’s tough talk on Beef, Bible & Bullets, even though in reality both candidates are likely to implement more or less the same (not so effective) measures. A new Boss, be it Lula or Bolsonaro, will most likely not trigger a Bossa Nova (new trend), being beholden by Congress and ideological chimeras. Being forced to choose between these two flawed candidates, we would opt for Lula, if alone because we trust him (and Marina Silva) more than the tree-chopping Bolsonaro fils on protecting the environment which is key for Brazil’s future (agricultural) prosperity. And then wait for another 4 years for a leader who actually wants and can bring about a Bossa Nova and unlock Brazil’s enormous economic potential…