Public accounts under pressure: market fears more expensive credit soon after Lula’s re-election

The first trading session after President Lula's reelection ended with signs of stress in the market. According to Gazeta do Povo, on Monday (26) the Stock Exchange stopped at the circuit breaker, something that had not happened for six years, the dollar hit R$5.60 and future interest contracts maturing in January 2029 reached 15.25% per year. The concern goes beyond the first weeks of the new mandate: investors fear that the lack of discipline in public accounts will make credit more expensive and restrict credit.

Experts consulted by Gazeta do Povo estimate that, without an adjustment in the accounts, financial institutions tend to be more cautious: they may reduce the supply of loans and make it more difficult to renegotiate existing debts. Central Bank data shows the size of the problem. In August, the commitment to bank debts already reached 50% of households' annual income, and almost a third of the income went to installments and interest. Allianz Trade predicts an increase in company insolvencies in Brazil until 2027, and the scarcity of credit helped to set records for judicial recovery and bankruptcies.

For José Márcio Camargo, from Genial, Lula's reelection would maintain the same policy that caused public debt, the deficit and the indebtedness of families and the government to grow in the last four years. Roberto Motta, also from Genial, condensed the market's demand with one sentence: in this administration, Lula will have to regain the trust of investors.

According to Gazeta do Povo, this pressure is divided into three requests: an immediate fiscal adjustment, an economic team with independence and an understanding of governability with a Congress with a conservative profile. In this scenario, InfoMoney reported that the government is considering changing the growth rules for the minimum spending floor on health and education, to be applied in the 2027 adjustment, but the proposal has not yet been made official. From what the vehicle found, these constitutional floors follow the collection and can grow above the general limit of the fiscal framework.

There is also a proposal coming from outside the government that is disturbing the market. André Lara Resende, former director of the Central Bank and former president of BNDES during the FHC administration, suggested in an article published on 25/9 that the Selic rate should fall to something close to 7.5% per year in about a year, from the current 13.75%, according to Revista Oeste and Times Brasil. According to Times Brasil, the idea foresees broad changes in the way monetary policy and fiscal policy relate. Lara Resende supported Lula in 2022 and was part of the transition team, but declined the invitation to the Ministry of Planning. In a text released on Monday (2), José Sergio Gabrielli, responsible for the government's re-election program, stated that the proposal "deserves special attention".

What changes for the investor

For those who operate interest rates, the dollar and the Stock Exchange, the table brings together three points of attention. The first is fiscal pricing: without a credible adjustment, the interest curve and exchange rate could remain under pressure, as suggested by the 15.25% level in the January 2029 contract. The second is credit: more restrictive banks and a higher cost of capital could weigh on companies dependent on financing and domestic consumption. The third is monetary policy, since the 6 percentage point drop in the Selic proposed by Lara Resende would require, according to the proposal itself, a new relationship between interest and public accounts. This reading does not predict prices or recommend buying or selling assets. The outcome depends on whether the proposal on constitutional floors is formalized and Congress's response.

Automatically translated from Portuguese.