Election-driven spending collides with Brazil's deteriorating fiscal trajectory

The simultaneous divergence between Brasília and Washington on interest rate policy — Brazil's central bank cutting the Selic to 13.75% in the same week the Federal Reserve raised its rate to the 3.75%–4% range — would, under normal circumstances, be the day's headline story. But what truly dominates Brazil's economic landscape this week is the collision between mounting fiscal pressure and an electoral calendar that appears to be dictating, almost openly, the Lula government's economic policy decisions.

With less than three weeks until the first round of voting on October 4, the Palácio do Planalto announced a 15% increase in Bolsa Família payments, raising the per capita benefit from R$142 to R$164, effective in October. Planning Minister Bruno Moretti attributed the measure to an R$11.5 billion reduction in projected pension spending for the year. His Finance counterpart, Dario Durigan, was categorical in denying any electoral motivation. But the context does not favor that reading: according to Folha de S.Paulo, the judicial validation of the increase involved reopening a case that had been closed for two years at the Supreme Court, routed to Justice Gilmar Mendes's chambers at the prior request of the Federal Public Defender's Office — a sequence of events that feeds market skepticism about the institutional integrity of the process.

The fiscal backdrop makes the picture even more uncomfortable. Ipea estimates that the central government posted a primary deficit of R$14.4 billion in August, bringing the year-to-date total to R$94.5 billion — 8.1% higher than the same period in 2025. More concerning still is the government's own upward revision of public debt projections: Brasília now sees gross debt approaching 90% of GDP by 2029, potentially breaching that threshold if fiscal results cluster at the floor of the target over the coming years. The Senate's Independent Fiscal Institution reinforces the diagnosis by showing that the rapid rise in debt is a key factor keeping the risk premium embedded in the long end of the yield curve elevated — a cost that, in turn, compresses equity multiples and raises the cost of productive capital.

The dollar closed Friday (18) up 0.11% at R$5.145, with the Ibovespa down 1.06% for the week, ending at 185,229 points — sitting on a technically significant support level, with ten trading sessions left before the day preceding the first round. Asset manager Kinea captures with precision the logic that keeps equities cheap without that constituting an obvious opportunity: the real discount "isn't in stocks, it's in rates." With the real Selic still among the highest in the world and the interest rate differential relative to the United States narrowing — Folha notes that local assets remain attractive to foreign investors, though the Fed's move makes the equation less favorable over time — equity investors receive a low premium on top of an extraordinary risk-free rate. In dollar terms, aggregate earnings of B3-listed companies are 36% below their 2010 level, according to Kinea.

Fiscal pressure is not exclusive to the federal government. Valor Econômico reports that Brazil's 26 states and the Federal District collectively project an aggregate primary deficit of R$36.9 billion for 2026, reversing four consecutive years of surplus — with 18 states expecting negative results. The electoral cycle is the common denominator, and the inevitable reckoning will be left for the next government.

That next government will also inherit a substantial backlog of unfinished projects: at least R$204 billion in road, rail, port, and waterway concessions that the Lula government promised to auction in 2026 and failed to deliver. The sanitation sector, by contrast, presents a more organized pipeline, with 31 planned auctions and R$66.3 billion in investments mapped by Abcon, covering 631 municipalities. The Transport Ministry plans to launch in December the first public call for railways under the private authorization regime, with the Minas-Rio corridor as the inaugural project — a model that grants the concessionaire a 99-year term and full ownership of the assets.

On the external front, agribusiness is advancing on two fronts. The government created a socio-environmental passport to shield Brazilian exports from new European anti-deforestation rules, while the Agriculture Ministry's executive secretary confirms that the European Union has accepted Brazilian sanitary protocols for poultry, soon reopening access to the European market — meaningful news for a sector that accounts for a significant share of the country's exports.

In the energy market, the convergence between geopolitics and the energy transition produced a notable data point: the price of marine biodiesel fell to its lowest historical level, making it cheaper than most conventional fuels, even as the conflict in the Middle East pushes S-10 diesel to R$7.13 per liter at Brazilian pumps — the highest level since May, according to the ANP. The combination pressures logistics costs but opens room for accelerating biofuel penetration in the transportation sector.

The week ahead brings a dense agenda: publication of the Copom minutes, which will detail the reasoning behind the Selic cut; release of the IPCA-15, the preview of September inflation; and Lula's address at the UN General Assembly in New York — an occasion the government typically uses to signal its foreign policy and sustainability agenda. New electoral polls should continue moving assets: the most recent Datafolha showed Lula at 39% and Flávio Bolsonaro at 36% in the first round, a technical tie that compresses further in the second round — with AtlasIntel recording a difference of just 0.4 percentage points between the two. For markets, electoral uncertainty combined with the deteriorating fiscal trajectory is the main source of volatility over the ten trading sessions remaining before the first round.

---