The market’s positive reaction on the first trading day after Brazil’s first-round presidential election rests on a bet: that a Flávio Bolsonaro administration would deliver a substantial fiscal adjustment. Investors are still waiting for the details. In early September, Adolfo Sachsida, a member of Bolsonaro’s economic team, said it would be possible to put the debt-to-GDP ratio on a downward trajectory within 18 months. Advisers have informally discussed spending cuts of as much as R$200 billion ($37 billion) in the first year. That sounds like a lot, but it amounts to roughly 1.5% of GDP — barely more than the estimated structural deficit of 1.4%.
That is where interest rates need to do some of the work. With real rates around 7% and economic growth of 2%, Brazil would need a primary surplus of roughly 3.25% of GDP to stabilize its debt. If real rates fall to 4%-5%, the required surplus drops to 1.6%-2.5%; at the 3% real rates seen during part of Michel Temer’s presidency, just 0.8% would be enough. The strategy behind Bolsonaro’s economic plan becomes clearer: cut spending, generate a credibility shock and let lower borrowing costs complete part of the fiscal adjustment.
The arithmetic works better than the timetable. Under Temer, the more substantial decline in real interest rates took two to three years to materialize — and happened in a world in which U.S. real rates were negative; today they are close to 2%. There is also an awkward circularity: for investors to charge the government less, they first have to believe in the adjustment. Yet Bolsonaro’s team has not detailed structural measures involving pensions, spending indexation, wage bonuses or unemployment insurance. Administrative reform, fewer ministries, job cuts and less bureaucracy can help, but are unlikely on their own to generate savings on the scale being discussed.
The equation becomes tighter because Bolsonaro is also promising tax cuts. Lower taxes, deregulation and cheaper money could lift investment and growth, improving debt dynamics over time. But tax cuts reduce revenue immediately, faster growth takes time, and asset sales reduce the debt stock only once. Until those benefits materialize, the fiscal adjustment still has to show up in the budget.
The bet, then, is not economically unreasonable: fiscal credibility can bring down interest rates and, with them, the primary surplus required to stabilize the debt. If every day were like Monday, things would be easier. But the week goes on — and market euphoria eventually has to meet fiscal arithmetic. The problem is treating lower rates as an assumption before showing where the spending cuts will come from. Credibility can reduce the size of the adjustment required. It cannot replace the adjustment that creates the credibility.
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