A stunning turnaround

Lula da Silva has multiple challenges

The re-election of Luiz Inácio Lula da Silva as President of Brazil has come as a shock to both markets and his domestic Opposition. His challenger, Flavio Bolsonaro, the son of the controversial former President, Jair Bolsonaro, had taken a handy lead in the first round of the presidential elections. This led, perhaps, to a certain degree of overconfidence among the right-wing challengers. In the end, thanks to an enormous effort to increase the turnout, the incumbent President pulled through a second-round victory, which didn’t appear close. This has never happened in Brazil’s history. For Mr Lula, who turned 81 on Tuesday, this election will no doubt be his last. But it will cement his reputation as South America’s most influential democratic left-wing politician of the past century. His story, from his beginning as a metal-worker, to his time in the trade unions, to victories in presidential elections, will inspire left-wingers across the continent, especially because much of the rest of it is dominated by the right.

 

President Lula’s last election was marred by what amounted to an abortive coup attempt launched by Jair Bolsonaro’s allies. Fortunately, there appears to be no such effort in progress on this occasion. The challenges for Mr Lula this time will be external. It is not his domestic Opposition but global markets that will revolt. And United States President Donald Trump has made no secret of his sympathy for Mr Bolsonaro, and has already declared that the election to him “looked rigged”. Of these two adversaries, the markets are the more concerning at present. Flavio Bolsonaro, in the course of his campaign, stressed the poor macroeconomic situation that Brazil was in. The numbers are, indeed, worrying. In the four years since Jair Bolsonaro was ousted in 2022, the country’s debt-to-gross domestic product ratio has increased from about 72 per cent to about 83 per cent. High interest costs and the left’s spending commitments make debt servicing quite hard; and there is no credible path towards consolidation that Mr Lula has laid out.

 

Unsurprisingly, the surprise news that he had been re-elected caused markets to fall. The stock market fell almost 14 per cent in one day, hitting the circuit breaker. Brazil’s currency, the real, fell more than 8 per cent against the dollar, its sharpest one-day drop since 2002. Real-denominated 10-year bond yields rose by more than 2 percentage points, hitting around 15 per cent. All of this deeply complicates Mr Lula’s attempts at stabilisation. He will not want to cut spending or benefits, and indeed plans to increase the wages (and thereby affect the path of future pensions, worsening the fiscal situation). But he cannot raise taxes easily to compensate because his party does not control the legislature, which has repeatedly resisted any attempt to raise the effective tax rate by closing loopholes.

 

It is likely, therefore, that if Mr Lula wants to work on his legacy over this term, he will look to geopolitics rather than economics. He may well take on the position of primary resister to the new Monroe doctrine that has been espoused by Mr Trump’s second administration. If so, India should expect a Brazil even more committed to counter-mobilisation against the US, and old-style “third-worldism”, than before.