Brazil runoff: Lula wins a fourth term

President Luiz Inácio Lula da Silva, Brazil's leftist incumbent, won the presidential runoff on October 25, defeating Flávio Bolsonaro, a right-wing senator, 51.8% to 48.2%, a margin of about 4.4 million votes. The result breaks a pattern: since 1989, the first-round leader had won all seven runoffs, and Bolsonaro led the first round 47.03% to 45.16%. Brazil's vote was the last in Latin America's 2025-26 election cycle and the only one won by a left-leaning candidate.

Lula's fourth term starts in a more constrained setting than his previous three: a right-leaning Congress, a U.S. administration aligned with his opponent, and neighbors that have mostly elected right-leaning governments. Markets had priced a Bolsonaro win, so we expect a negative initial reaction. Over the medium term, we see the impact on growth as broadly neutral.

Lula's agenda in a right-leaning Congress

Lula campaigned on continuity: keeping the fiscal rule adopted in 2023, which limits the growth of federal spending, protecting social programs, and using public investment, state-owned companies and public banks to support growth.

Much of that agenda is already in place and can continue without a vote in Congress. That includes the fiscal rule, real increases in the minimum wage, the income tax exemption for earnings up to R$5,000 a month (in force since January 2026) and the Novo PAC infrastructure program, as well as the strategy at state-controlled oil company Petrobras, including its return to fuel distribution. Congress has also already approved a constitutional amendment ending the six-day workweek, which passed the Senate 75 to 1 on October 14 with Flávio Bolsonaro's support and now awaits promulgation. It lowers the maximum workweek to 42 hours two months after publication and to 40 hours a year later, with no cut in pay.

The rest of the agenda consists of new measures, which go to a Congress in which Lula's allies are in the minority. Brazil's legislature has two chambers, the 513-seat Chamber of Deputies and the 81-seat Senate, and the new proposals fall into two groups:

• Laws, which need a majority in both chambers: further taxes on high incomes, cuts to tax benefits, a larger Bolsa Família cash-transfer program, a new Ministry of Public Security and regulation of app-based work. Most need a simple majority of members present; complementary laws, such as the app-work rules, need 257 deputies and 41 senators.
• Constitutional amendments, which need three-fifths of each chamber in two rounds of voting, or 308 deputies and 49 senators: expanding the federal government's role in public security.

Grouped by how parties aligned in the runoff, the Congress that takes office on February 1 looks like this:

Even with every unaligned party, Lula's coalition falls short of a majority in both chambers. Most new measures will therefore need votes from the centrão, a group of pragmatic parties that have traditionally backed sitting governments in exchange for cabinet posts and budget funds.

Market implications

We expect markets to react negatively in the near term, though we do not see the result as a lasting shift in Brazil's outlook. After the first round, markets moved quickly to price a Bolsonaro victory. On October 5, the first trading day after the vote, the Ibovespa, Brazil's main stock index, posted its largest one-day gain in six years, and long-dated interest rates fell about 150 basis points over the following week, to around 12%.

In fixed income, long-dated rates are likely to give back part of their recent decline, and markets may price fewer cuts to the central bank's benchmark Selic rate, currently 13.75%. The real may also give back some of its gains, although interest rates that stay higher for longer keep the extra yield from holding the currency, known as carry, among the highest in emerging markets, which should help limit the move.

In equities, we expect a pullback that varies by sector. Banks and other rate-sensitive domestic stocks led the post-first-round rally and are the most exposed to its reversal, while exporters such as miner Vale and pulp producer Suzano, which lagged as the real strengthened, are better positioned. Petrobras and other state-linked companies present a more mixed picture.

Beyond the initial reaction, continued government spending should support consumption and leave the impact on growth broadly neutral, while further equity gains would likely be driven more by global appetite for emerging markets than by domestic factors.

What to watch

A key question for markets is whether they will price a further deterioration in Brazil's fiscal position. Gross public debt reached 82.9% of GDP in August, and most of the budget goes to mandatory spending, which leaves little room to expand programs without new revenue.

The first signals will come from the choice of finance minister and the 2027 budget, which Congress must pass before year-end. A market-credible appointment and a budget within the fiscal rule would help ease those concerns, while signs of looser spending would likely keep long-term rates and Brazil's risk premium high. In February, Congress will elect the presidents of the Chamber and the Senate, who set the legislative agenda, and the outcome will show how much support the government can count on to pass its measures.

Abroad, relief from the 25% U.S. tariff looks less likely than it would have been under a Flávio Bolsonaro government, while ties with China, which buys about 29% of Brazil's exports, are expected to remain intact.

Another is how Lula will shape his legacy. At 80 years old, he cannot seek reelection in 2030. He could prioritize social programs, public investment and labor reforms, which would support consumption but add to fiscal pressure. Or he could aim to leave behind a stable economy and sounder public finances. How he balances these goals will be a key driver of Brazilian assets through the end of the decade.