Brazilian President Luiz Inacio Lula da Silva pulled off a dramatic comeback to win the presidential runoff, halting the right-wing wave sweeping across Latin America and defying predictions that the remarkable political career of the 80-year-old veteran had reached its end. However, this unexpected outcome is expected to upend the so-called "Bolsonaro trade," and Brazilian markets may plunge sharply when they open on Monday.
According to Brazil's electoral court, in Sunday's vote, Lula secured 51.8% of the vote while Flavio Bolsonaro received 48.2%. In response to the result, Bolsonaro demanded that the court annul the runoff, accusing the Supreme Court of ordering a last-minute extension of voting hours, which amounted to a temporary change to the rules. Election day was chaotic, accompanied by allegations of voter suppression, and voting hours were extended by two hours at the last minute.
The left-wing leader Lula only managed a narrow victory at the very last moment, buoyed by support from Brazil's poorest regions, his traditional strongholds. For a long time, Lula has been a representative figure in Latin America's opposition to "Trumpism."
Market Shock
For investors who had hoped Bolsonaro would straighten out Brazil's finances, Lula's victory is undoubtedly a heavy blow. Although Bolsonaro had not yet detailed his spending-cut plans, traders had already rushed into Brazilian stocks, betting that he would be more committed than Lula to addressing fiscal problems. Lula has consistently focused more on stimulating consumption to boost economic growth rather than tackling Brazil's severe fiscal predicament.
Now, this stunning election reversal is expected to trigger violent swings in Brazilian markets. Early signs have already emerged, with an ETF tracking Brazilian stocks plunging as much as 16% in the Japanese market on Monday. Traders expect selling pressure in Brazilian markets on Monday morning to be intense and potentially trigger a circuit breaker. Societe Generale strategists expect the real to fall 8% to 10% on Monday. The Brazilian real has appreciated more than 9% so far this year.
Daunting Challenges
Lula's unprecedented fourth election as president extends a political career spanning more than four decades and deals a heavy blow to the political movement built by former President Jair Bolsonaro. Bolsonaro's eldest son had sought to return to the presidential palace by leveraging the family's fame and a populist platform with a "MAGA (Make America Great Again)" flavor.
As the oldest president in Brazil's history, Lula now has another four-year term to continue stabilizing Latin America's largest economy while trying to ease the political polarization exposed by this fierce campaign. But this will be a near-impossible task. Domestically, irreconcilable ideologies have fractured Brazilian society. Lula's political identity and convictions stem from his rise as a union leader, his resistance to Brazil's dictatorship, and his criticism of U.S. military interventions abroad. His archrival, by contrast, is characterized primarily by patriarchal conservatism, evangelical fervor, and laissez-faire capitalism.
Lula also faces numerous economic headwinds ahead, chief among them addressing rising deficits and debt, which have kept interest rates elevated. This has intensified investor concerns; and more urgently for Lula, it has left Brazilian households deeply mired in debt, with personal loan default rates climbing to their highest level in two decades.
"He may think he can rest easy, but he was re-elected in an environment of fragile institutions," said Creomar de Souza, founder and CEO of Dharma Political Risk and Strategy in Brasilia. "He will need to build a coalition, even though his victory sends a strong signal to the far right, forcing it to rethink how it operates."
When Lula ended his second consecutive term in 2010, his approval rating stood at 83%, a number today's politicians can only dream of. However, those glory days are long gone. Since then, Lula has experienced several ups and downs, been mired in corruption scandals, and was once imprisoned, with his former luster gradually fading. Now, he faces daunting challenges unlike any before. He needs to quickly reassure investors that the government can restore the soundness of the nation's finances and stop sinking the country deeper into a debt morass.
Brazil's Debt Problem That Cannot Be Ignored
During Lula's third term, Brazil's unemployment rate approached historic lows, hitting 5.4% in July, while economic growth outpaced the United States and repeatedly exceeded economists' forecasts. Lula also raised the minimum wage by more than the rate of inflation and reformed the tax system, reducing the burden on low- and middle-income Brazilians while increasing taxes on the wealthiest.
Lula had previously promised fiscal adjustment but did not specify how he intended to achieve it, while making clear he would not sacrifice his social agenda under pressure from financial markets.
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