Another twist in Brazil's election, but our base case is unchanged
|Summary
Late last week, former President Jair Bolsonaro formally endorsed his son, Flavio, as a presidential candidate to represent the right side of the political spectrum in Brazil's 2026 general election. Local FX, rates, equities and credit all sold off in response as markets were hoping Bolsonaro would endorse investor favorite Tarcisio de Freitas. Not endorsing Tarcisio is disappointing as Tarcisio has a technocratic track record and is well respected in Brazilian political circles, but Bolsonaro's influence over right-leaning voters and his good enough relationship with the powerful unaffiliated Brazilian political parties (the Centrão) means anyone he endorsed, including his lesser known son, is a legitimate candidate and can make a real push at the presidency next year. This is important as we view Flavio as an extension of his father's policy platform: reinstating fiscal discipline, restoring public safety and cracking down on corruption. All exactly what Brazil needs, and not materially different from the platform Tarcisio would have likely run on if he had been the one to receive the coveted Bolsonaro endorsement. We have argued that the opposition to Lula candidate's policy platform is more important than the candidate, a view we retain at this time. So in that sense, while Flavio's endorsement adds another layer of complexity to an already complicated election, we are hesitant to draw the conclusion that Bolsonaro's endorsement of Flavio improves Lula's chances of winning a fourth term next year.
All in, our pre-endorsement base case scenario for Brazil's election centered around Lula being unseated next year is unchanged. With that said, conviction for political turnover is still not strong, and we still assign only a 55% likelihood of Lula being defeated in 2026. We do, however, have stronger conviction in the path ahead for the Brazilian real (BRL) and Brazilian Central Bank (BCB). And while local political dynamics will absolutely influence BRL and the BCB, we believe the Brazilian real can struggle over the medium-term on a variety of factors, mostly political in nature, even as BCB policymakers adopt a gradual approach to easing.
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