Brazil's political landscape was jolted by a "black swan" event. Following unexpected political developments, Brazil's financial markets suffered a dual blow, with stocks and the currency plummeting. On Friday, December 5, the Ibovespa stock index plunged over 4%, marking its worst single-day drop since 2021, while the Brazilian real tumbled more than 2% against the U.S. dollar.
The latest reports indicate that Flavio Bolsonaro, the eldest son of former President Jair Bolsonaro and a current senator, announced he has secured his father's backing to challenge incumbent President Luiz Inácio Lula da Silva in the 2026 election.
Analysts note that investors had previously bet on Bolsonaro endorsing a more market-friendly, experienced candidate—such as his former minister and São Paulo Governor Tarcísio de Freitas—to challenge Lula. The sharp market downturn suggests investors are rapidly unwinding their "Freitas candidacy" bets.
**Market Turmoil** On December 7, reports confirmed Flavio Bolsonaro's announcement of his presidential bid, vowing to continue his father's political agenda. He has gained support from the far-right Liberal Party, the largest bloc in Congress, as well as his siblings and his father's current wife, Michelle Bolsonaro.
Previously, many investors favored Governor Tarcísio de Freitas as the right-wing candidate, believing Bolsonaro's family members stood little chance against Lula. The right-wing's fragmentation could now bolster Lula's re-election prospects.
The political uncertainty triggered a market rout on December 5, with the Ibovespa index crashing 4.31% and the real sliding 2.5% against the dollar. Analysts interpret this as a rapid unwinding of Freitas-related bets.
André Perfeito, an economist at Garantia Capital, warned that Flavio's candidacy risks fracturing the right-wing coalition built by his father.
**Political Backdrop** Flavio Bolsonaro, 44, was elected senator in 2018 after serving as a Rio de Janeiro state legislator. His father, Jair Bolsonaro, is serving a 27-year prison sentence for allegedly plotting a coup after losing the 2022 election.
Meanwhile, Lula, who previously governed Brazil from 2003 to 2010 and returned to office in 2023, has signaled plans to seek a non-consecutive fourth term.
**Economic Slowdown** Brazil's economy grew just 0.1% quarter-on-quarter in Q3, below the 0.2% forecast, with momentum weakening after Q2's revised 0.3% growth. The slowdown, driven by sluggish services and household spending, reinforces expectations of potential monetary easing in early 2024.
According to Austin Rating, Brazil may have slipped out of the world's top 10 economies by GDP, falling to 11th place as Russia climbed to 9th. The shift stems largely from the ruble's 38% appreciation this year, despite Brazil's improving GDP outlook and narrowing gap with Canada and Italy.
Comments