The Fiscal Anchor and Post-Election Market Reactions in Brazil

The health of public accounts is a fundamental pillar for any nation's economic stability, and in Brazil, an emerging market with a history of volatility, the perception of fiscal policy is a crucial driver for financial assets. During electoral periods, uncertainty regarding the direction of fiscal management intensifies this dynamic, with investors and analysts closely monitoring signals that can influence the exchange rate, interest rates, and inflation expectations. Understanding how this uncertainty translates into market movements is essential for anticipating scenarios.

A recent study by Banco Inter analyzed the impact of fiscal-electoral uncertainty on the Brazilian real and future interest rates during the last three presidential elections (2014, 2018, and 2022). The research revealed that, within 30-day windows around the second round, fiscal uncertainty contributed to currency depreciation ranging from 2% to 4%, even after isolating other external risks. In the interest rate market, future rates showed an average increase of 0.06 percentage points, with a cumulative rise of 0.3 points across the entire term curve. This movement is primarily explained by higher inflation expectations for the following year, which, in turn, demands a more restrictive monetary policy stance from the Central Bank in subsequent years.

Conversely, the study projects an optimistic scenario if the elections point towards a fiscal adjustment perceived as credible. Such an outcome would have the potential to strengthen the real, pushing the dollar below R$ 5. Additionally, inflation expectations for 2027 could be reduced by 0.15 percentage points, and the market would price the Selic rate at a level 0.35 points lower for the next two years. These figures underscore the sensitivity of domestic assets to the prospect of more austere and transparent fiscal management.

In a global macroeconomic context where risk aversion can direct capital towards more stable economies, a signal of fiscal responsibility in Brazil is a powerful draw. A clear and credible fiscal direction not only calms domestic markets but also reduces the country's risk premium, making it more attractive for foreign investment and lowering borrowing costs for the government and businesses. This dynamic contributes to an environment of lower inflation and interest rates, fostering sustainable economic growth. The perception of fiscal credibility thus acts as an anchor for the economy, mitigating volatility and fostering confidence. Original source: Valor Econômico