Brazil's Real Slides After Lula Wins Re-election

Brazil's real fell sharply against the US dollar on Monday after President Luiz Inacio Lula da Silva won an unexpected re-election. His challenger, the right-wing candidate Flavio Bolsonaro, is the son of former President Jair Bolsonaro and had led the first round of voting earlier this month.

The currency lost 12 percent against the dollar in spot trading, while Bovespa stock index futures tumbled nearly 15 percent. The Brazilian stock exchange halted trading for 30 minutes after the Bovespa index dropped 10 percent from its previous close, which triggered a circuit-breaker safety mechanism. The slide erased a rally earlier in the month, when investors had anticipated a shift to the right following Bolsonaro's first-round showing.

Analysts said the move reflected a rush to unwind earlier positions. "I'm not surprised the real is sinking sharply; traders are covering their bets that assume a Bolsonaro victory and tighter fiscal policy," Rachel Ziemba, adjunct senior fellow at the Center for a New American Security, told Al Jazeera.

Ziemba added that Bolsonaro's refusal to concede has contributed to some financial uncertainty. "The market pressure is also amplified by the objections raised by Bolsonaro, but the scale of the victory suggests that the result will stand," she said.

Before the result, markets had priced in a different outcome. Stocks closed on Friday almost 7 percent above their level before the first round, and the real was nearly 5 percent stronger against the dollar. Interest rate futures, which had reflected expectations that a Bolsonaro government would pursue tighter fiscal policy and allow borrowing costs to fall, rose 3.1 percent sharply after Lula's win.

"They [investors] assume more domestic spending and higher rates in Brazil. However, the real is still likely to be supported by strong commodity revenues," Ziemba noted.

Lula now faces rising debt in Brazil and the task of protecting both social programmes and investment. Investors are watching for signs of whether his gradual approach to fiscal policy can bring borrowing costs down. His team aims to reach a budget surplus of about 1.3 percent of gross domestic product (GDP) by 2030, which would cover part of the interest bill and reduce the need for fresh borrowing. However, public debt already exceeds 82 percent of GDP, and pensions and other legally required spending limit where savings can be found.

Some analysts want more detail on how the government would deliver. "Lula's policies have talked about spending cuts, but he has not gone into the details of how that is going to look," said Divya Singaravelu, head of research at Meridian 1305 Capital.

Attention will now turn to Lula's choice of finance minister and what that appointment signals about his fiscal approach.