Re-elected Lula: Capital Economics sees debt towards 95% of GDP and brake in Selic cuts

Capital Economics, according to the headline, projects that Brazil's public debt will rise toward 95% of GDP following Lula's re-election, and expects a slowdown in the pace of Selic rate cuts. The core transmission channel is fiscal risk premia: a rising debt-to-GDP trajectory raises expectations of higher long-term sovereign yields and forces the central bank to hold policy rates higher for longer to anchor inflation expectations. Brazilian local-currency government bonds and the real are the most directly exposed assets, since they reprice first when fiscal credibility is questioned, while rate-sensitive equities and domestic credit face tighter financing conditions as the easing cycle stalls. Traders should watch the next Copom decision and the accompanying forward guidance on the Selic path, as well as the fiscal framework details and primary balance targets that the new administration presents, since these will determine whether the debt projection is revised.

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