Dollar hits year-high as Lula promises fiscal responsibility without concrete measures

The dollar closed at R$5.487 on Thursday, its highest level of the year, and the stock market retreated in yet another session marked by investor distrust — a picture that captures with precision the central tension of the Brazilian moment: a re-elected government that talks about fiscal responsibility but refuses, so far, to present any concrete measure to address it.

Lula gathered ministers, former ministers, and economists close to the PT throughout the day in a summit that ended without announcements. Finance Minister Dario Durigan promised "better results in public accounts for the coming years," but nothing specific. Later, the president publicly declared that "we have to have fiscal responsibility" and that a "well-run economy" is a precondition for attracting investment. For a market expecting substantive signaling, the speech rang hollow. According to Valor Econômico, Lula is set to address the nation on Sunday — but his advisors are already signaling that no measures will be announced, which, in analysts' view, risks deepening the asset selloff rather than containing it.

The backdrop is grave. Gross government debt reached 82.9% of GDP in September, up 4.3 percentage points since the start of the year, according to the Central Bank. Current estimates suggest a primary adjustment of at least 3 percentage points of GDP would be needed to stabilize it. Yet the government itself is studying a change to the fiscal framework that would automatically lower the spending cap in case of revenue shortfalls — a rule change that, while technically defensible, arrives at a moment when any sign of loosening the fiscal anchors amplifies distrust. For fund managers heard by Brazil Journal, the "wave of discouragement" that has taken hold among entrepreneurs should start to hit GDP from 2027 onward, when the economy — already operating near its potential capacity — will feel more acutely the effects of high interest rates and fiscal uncertainty.

The Selic at 13.75% — held by the Copom on Wednesday, interrupting the cutting cycle — is increasingly being treated by analysts less as a technical Central Bank decision and more as a variable dependent on the government's fiscal behavior. If Brasília does not deliver the adjustment, the BC has no room to cut. This is the vicious circle the market is pricing in.

Activity data released Thursday reinforce the slowdown scenario. Industrial production fell for the second consecutive month in September, with a decline steeper than economists had expected. The October services PMI deepened its contraction, registering the sharpest drop in new work in five and a half years, with layoffs for the second month running and deteriorating business confidence. The Ibovespa, which still holds a gain of just over 4% for the year, masks the bleeding: the small-caps index fell 17.45% in October alone, reflecting these companies' sensitivity to the domestic interest rate cycle.

On the tax reform front, the government is trying to hold the timeline. Minister Durigan ruled out postponing the CBS, scheduled to take effect in January 2027, and promised only to extend deadlines for ancillary obligations. The provisional measure on the Selective Tax, the so-called "sin tax," was well received by the affected sectors — the logic of keeping the burden equivalent to the IPI in 2027 avoided immediate conflicts with industry. But market economists, such as Gabriel Leal de Barros of ARX, warn that the reform is being conducted with emphasis on the revenue side, not the spending side, which historically produces more inflation and less potential growth. CNI, for its part, is asking the Senate to review the reference rate of 11.3% calculated by the TCU, arguing that it implies a real increase in the tax burden.

In a telling sign of the regulatory tensions permeating the second week after the election, the STF scheduled a conciliation hearing between companies, unions, and the government to address the transition away from the 6x1 work schedule — a theme with direct labor costs for the most labor-intensive sectors.

On the external front, one genuinely positive piece of news emerges: Brazilian exports to the European Union totaled US$44.2 billion between January and September, up 20% over 2025, with US$6.4 billion of that increase concentrated in the months after the Mercosur-EU agreement came into force, according to Apex. It is the first consistent data point quantifying the commercial impact of the historic agreement — and it arrives at a moment when Brazil needs good news on the balance of payments. In parallel, the government approved the list of 27 critical and strategic minerals, and Lula signaled that the State will not be the "supreme lord" in the exploitation of these resources, seeking private partners — an important gesture in a geopolitical context in which Western powers and China are competing for supply chains of minerals essential to the energy transition.

In the aerospace sector, Embraer, whose shares trade on the NYSE and B3, closed a deal with US-based Wheels Up to supply six Phenom 300E jets, with deliveries scheduled for the second half of 2027, and is advancing a commercial and military push in India, one of the world's fastest-growing aviation markets. Honda, meanwhile, announced R$3.3 billion in investments in Brazil through 2030, expanding production capacity in Manaus to 2.3 million motorcycles annually — a meaningful vote of confidence at a moment when the domestic business environment inspires caution.

The week ahead will be defined by the quality of the fiscal signal Lula decides to send on Sunday. The market is not demanding a complete austerity plan — but it wants evidence that the government recognizes the magnitude of the problem and is willing to make difficult decisions before asset deterioration forces its hand under even worse conditions.

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