Electoral Stimulus Clashes with Fiscal Credibility Twelve Days Before Runoff

Electoral pressure is reshaping Brazil's fiscal calculus twelve days out from the runoff, and the market hasn't quite decided what to make of it.

President Luiz Inácio Lula da Silva unveiled on Tuesday a package aimed at individual microentrepreneurs totaling R$17.6 billion in potential commitments: forgiveness of R$12.86 billion in debts enrolled in the Federal Active Debt registry, benefiting 3.67 million debtors, and the creation of the so-called Pix MEI, a non-reimbursable credit of up to R$5,000 for reinvestment in their own businesses. The Finance Ministry acknowledges a fiscal impact of R$3.04 billion over three years from the debt forgiveness alone, and the enabling bill was crafted to sidestep requirements of the Fiscal Responsibility Law — a signal that, combined with the simultaneous announcement of Pé-de-Meia Universitário, valued at R$4.6 billion annually, immediately tightened the mood in markets. The dollar closed up 0.74% at R$5.022 in the first session following the holiday, in a scenario mixing electoral volatility with the gradual erosion of the optimism that gripped markets last week, when Flávio Bolsonaro took the lead in the first round. Ibovespa slipped on profit-taking.

The context is telling. Market economists raised their inflation projections and trimmed Selic estimates for this year but, according to a survey published Tuesday, made no significant revisions for 2027 — a sign that post-first-round euphoria wasn't enough to anchor longer-term expectations. The IMF, for its part, cut against the optimistic domestic narrative: it lowered its Brazilian GDP growth forecast while raising the global outlook, reversing the reading from three months ago. Silvana Tenreyro, the Fund's chief economist, warned that Latin America and the Caribbean should see inflation rise to 4.2% this year and remain at 4.1% in 2027, demanding vigilance from the region's monetary authorities.

The tension between electoral stimulus and fiscal responsibility grew sharper with the maneuvering around PEC 221, which proposes ending the 6x1 work schedule. The Senate resumed sessions to analyze the proposal, and the private sector mobilized in opposition. Abrasel, the association representing bars and restaurants, labeled approval of the PEC a "potential socioeconomic disaster," a position shared by industry bodies and food retailers. Flávio Bolsonaro, who had previously rejected the measure, announced he would vote in favor — a pivot that Valor Econômico framed as last-minute electoral opportunism. The Planning Ministry, through Minister Bruno Moretti, insisted that a potential second Lula government would carry out gradual fiscal adjustment over four years, ruling out the more accelerated pace signaled by the opposing camp.

On the external front, the day's biggest data point favored Brazil: the Mercosur-European Union agreement, in force since May, boosted Brazilian exports to the bloc by 30.7% between May and September on an annual basis, according to Minister Márcio Elias. In the cumulative January-to-September tally, sales reached US$44.17 billion, up 20% year-over-year. Bilateral trade has grown by more than US$6 billion since the treaty took effect. With that stage advanced, analysts and diplomats are already pointing to the next logical step: a Mercosur-China trade agreement, a partnership that would be even more significant in volume terms, especially against a backdrop of US tariffs that continue to pressure regional export chains.

That context of trade redirection matters to agribusiness, which is heading toward another record year for the trade balance. From January through September, the sector generated US$133.6 billion in foreign exchange, but the fourth quarter brings considerable unknowns. Beef exports in September plunged 35% year-over-year to 229,000 tonnes, with Chinese purchases falling 93% to just 13,000 tonnes. The surprise is in prices: despite the collapse in export volume, the cattle arroba is approaching R$380, according to Cepea data, sustained by robust domestic demand. Some project R$400 before the end of 2026.

The residential real estate market offers another sign of structural pressure on the urban consumer. Rents accumulated a 9.13% increase over the 12 months through September, practically double the IPCA of 4.58% in the same period, according to the FipeZAP Index. Although the monthly pace is decelerating for the sixth consecutive month — September posted 0.52%, the smallest variation since April — housing costs are still running well ahead of headline inflation, eroding middle-income families' purchasing power and fueling debate about the effectiveness of the housing policy framework.

In infrastructure, two moves warrant attention. Cagece, the Ceará state sanitation company, relaunched the tender for four PPP blocks after a failed auction in June, when it couldn't attract enough bidders. The new tender is set for December 16 — an additional test of private investor appetite for sanitation projects in the Northeast. In the power sector, Aneel approved new rules on renewables curtailment, aligning the treatment of wind and solar generators with that of run-of-river hydro plants. For wind sector associations, the change amounts to a net cost transfer onto renewables — a negative signal for investors in clean generation projects at a moment when the country needs to expand installed capacity.

In the days ahead, the focus will be on currency behavior as new electoral polls are released and the MEI package advances in Congress. Markets' reaction to the size of the fiscal commitment taken on by Lula — and to the credibility of the adjustment promised by both candidates — will set the tone for Brazilian assets through the October 25 runoff.