Brazil's fiscal deterioration collides with weakening growth on election eve

The eve of the first round of presidential elections revealed, on Thursday, a fissure that the electoral calendar can no longer disguise: the Lula administration simultaneously loosened its budget freeze and fiscal targets, while the Central Bank revised growth projections downward and consumer confidence hit its worst level in nearly four years. The paradox is acute — the economy is slowing, public accounts are deteriorating, and the Planalto is responding with stimulus.

The monetary policy report released by the Central Bank on Thursday cut its GDP growth projection from 2% to 1.8% for 2026, with an even more subdued outlook of 1.4% for 2027. The revision incorporates an unfavorable composition of second-quarter growth and signs of moderation on both the supply and demand sides. At the same time, the BCB warned that IPCA inflation is likely to remain above the 3% target midpoint until at least the first quarter of 2029, reinforcing the high-interest-rate environment that is already eroding household confidence. FGV's Consumer Confidence Index fell for the fifth consecutive month in September, reaching 84.2 points — the lowest level since November 2022 — a signal that the tight labor market and Bolsa Família have stopped functioning as an antidote to the pessimism of indebted families. Nearly half of Brazilians say their income does not cover expenses, according to Datafolha.

It is in this context that fiscal deterioration takes on troubling proportions. The government made official that the actual primary deficit for the year already totals R$80.9 billion — excluding the deductions permitted by the fiscal framework — after revealing a R$24.4 billion worsening compared with the previous two-month period, driven by falling revenues and a R$22.1 billion increase in primary expenditures. The budget freeze was reduced from R$17.9 billion to R$13.6 billion. The government also decided to maintain the R$2.12-per-liter diesel subsidy for another 30 days, justified by the prolongation of the Middle East conflict but announced on the eve of the first round — a combination that former Central Bank president Arminio Fraga summed up with surgical precision: Brazil is a patient with a 42-degree fever, in an unsustainable fiscal situation that requires reforms, not palliative remedies. Executives interviewed by Folha de S.Paulo echo the same reading: the next government will need, before any concrete measure, to convey credibility on the adjustment, in a country that is politically polarized and distrustful.

Financial markets reacted to the set of pressures. The dollar closed up 0.48%, at R$5.193, tracking the global strengthening of the DXY, while the Ibovespa fell 0.95%, weighed down by rising oil prices and U.S. rates on investors' radar. The index's decline was compounded by a sector shock of considerable proportions: Mercado Livre's announcement that it will begin selling prescription-controlled medications — including antibiotics and GLP-1 pens such as Ozempic and Mounjaro — sent shares of major pharmacy chains down as much as 8.5% during the session. RD Saúde closed down 5.5%, Pague Menos lost 7.7%, and Panvel plunged 6%. GLP-1s had accounted for more than a third of Pague Menos's recent growth — and Mercado Livre, whose shares trade on Nasdaq, has just entered this niche directly with delivery in as little as 60 minutes in São Paulo.

On the regulatory front, the National Monetary Council tightened rules for FIDCs, prohibiting the acquisition of receivables tied to lawsuits and arbitrations without a final decision — a direct response to the Carbono Oculto and Banco Master cases. The Master case continues to unfold on multiple simultaneous fronts: Central Bank president Gabriel Galípolo confirmed a summons from the Federal Police to testify as a witness in October; STF Justice Flávio Dino ordered the opening of an inquiry to investigate possible omission by the CVM; the Federal District Court of Accounts froze assets of former BRB executives; and new messages reveal payments from Daniel Vorcaro to relatives of Central Bank employees. The third phase of Operation Carbono Oculto added another layer to the scandal, pointing to Banco Genial as a structure used to give the appearance of conventional loans to funds linked to the PCC.

On the energy and climate transition agenda, Petrobras announced a one-year delay — to 2030 — in the start of dedicated SAF operations, the sustainable aviation fuel, advancing for now only via co-processing. The state-owned company also ruled out going it alone with capital injections into Braskem, while the São Paulo Public Prosecutor's Office recommended a temporary restriction on transfers from the petrochemical company for the restructuring of its Mexican subsidiary Braskem Idesa. StoneX is structuring a project to convert sugarcane mills into corn ethanol plants during the off-season, with investments ranging from R$400 million to R$1.2 billion per unit. In the coffee sector, Conab projects a record harvest of 67.6 million bags, driven by the biennial cycle and favorable weather conditions — news that contrasts with the deteriorating domestic outlook.

A positive note with geopolitical relevance: the Central Bank has begun, jointly with the ECB, a formal assessment to interlink Pix with TIPS, the European instant payments platform — a step that, if completed, would significantly expand the international footprint of Brazilian financial infrastructure. For the coming week, the immediate focal points will be the release of September's IPCA-15 — with expectations of a 0.55% increase — the ruling on Caixa Econômica Federal's collective bargaining dispute at the TST on Tuesday, Galípolo's testimony to the Federal Police in October, and, above all, the result of the first round of presidential elections, which will set the tone for fiscal discussions in the months ahead.