Morgan Stanley warns of fiscal risks for Brazil ahead of elections
Morgan Stanley analysts cautioned investors against excessive confidence in Brazil’s current economic policy ahead of the October elections. According to The Rio Times, citing Valor Econômico, the bank modeled an adverse scenario in case no convincing fiscal plan is presented after the vote.
Scenario without a fiscal plan
According to Morgan Stanley’s assessment, without such a plan, the dollar exchange rate could return to 6 Brazilian reais per dollar. Ten-year nominal rates could rise to around 18% in this scenario, while the Ibovespa stock index could fall to 130,000 points, or by 25%.
The bank also forecasts that the DI rate for contracts maturing in January 2029 could rise to 16.5%. In the adverse scenario, the Selic rate could reach 15.5%, while in a favorable scenario involving a convincing fiscal plan, Selic could fall to 9.75%.
In the favorable scenario, Morgan Stanley expects the dollar exchange rate to decline to 4.5 reais, and DI rates for January 2029 to approximately 11%. The bank believes that the decisive factor for the currency, debt and stock markets will be a fiscal program that markets recognize as convincing.
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Budget for 2027
The warning came as the government prepares a draft budget for 2027, which must be submitted to Congress by August 31, 2026. Finance Minister Dario Durigan presented figures on August 24 that envisage a primary surplus of around 73.2 billion reais, or 0.5% of GDP.
According to data cited by The Rio Times, the target depends on excluding 65.66 billion reais in spending from budget calculations, including part of court-ordered payments and spending on defense, healthcare and education. Without such adjustments, the projected primary surplus amounts to 7.99 billion reais, or 0.05% of GDP.
The government also forecasts that the minimum wage will increase to 1,741 reais in 2027. The draft budget must take into account the new consumption tax model, although the selective tax rate has not yet been determined.
