Luiz Inácio Lula da Silva has clinched an unprecedented fourth term as Brazil’s president, staging a dramatic comeback to defeat Jair Bolsonaro in a closely watched runoff election. Despite the decisive vote, Bolsonaro refused to concede, signaling potential challenges to the results. Following Lula’s victory, the iShares MSCI Brazil ETF (EWZ) plummeted nearly 20% in overnight trading, as markets braced for increased volatility and concerns over the incoming leftist administration’s fiscal policies.
Luiz Inácio Lula da Silva has achieved an unprecedented fourth term as Brazil's president, staging a dramatic comeback from a first-round deficit to defeat Jair Bolsonaro in a fiercely contested runoff election that deeply divided the nation. Lula garnered 51.8% of the valid votes against Bolsonaro's 48.2%, with nearly all ballots tallied on Sunday, October 30, 2022.
This victory is particularly historic, marking the first time since Brazil's return to direct elections in 1989 that a candidate has won the final runoff after an initial loss in the first round.
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The outcome, however, was immediately met with resistance from the incumbent. Bolsonaro refused to concede defeat, with Reuters reporting his intent to seek the annulment of the election results. He also criticized a ruling by Supreme Court Justice Cristiano Zanin to extend voting hours as "unacceptable." The election process itself faced allegations of voter suppression, including reports from Lula's campaign of suspended public transportation in key areas, which prompted the court's decision to extend voting times. Bolsonaro's campaign also requested an extension, citing heavy rains that impacted polling stations in a right-wing stronghold.
The return of the 77-year-old leftist leader, who previously served two terms from 2003 to 2010, challenges a rightward political shift across Latin America that former U.S. President Donald Trump had notably supported. According to Daniela Portella Sampaio, a senior research fellow at the Royal United Services Institute, Trump, who had previously lauded Bolsonaro's first-round lead as "a very, very big victory," would have preferred a Brazilian leader more aligned with U.S. foreign policy objectives in the Americas.
Lula, who has previously engaged in public disagreements with Trump, is set to govern from 2023 to 2026. He will face a significant challenge in Congress, where Bolsonaro's Liberal Party holds its largest bench in decades, and must contend with a substantial public debt that requires urgent stabilization.
VIDEO: Brazil's Lula wins presidential election in runoff vote (1:38)
Source: Squawk Box Asia
Brazil's economy has been grappling with worsening fiscal health and mounting public debt, driven by high interest rates, elevated debt servicing costs, and rigid mandatory spending. The gross debt reached 82.9% of the country's GDP in August 2021, according to the Central Bank of Brazil, marking its highest level since March of that year.
Markets Brace for Volatility After Lula's Unexpected Win
Investors are anticipating heightened volatility across Brazilian markets following Lula's victory, as the right-wing Bolsonaro was generally seen as more likely to pursue fiscal austerity and deregulation. This perception made Lula's win a surprise to many market participants.
Reflecting these concerns, the iShares MSCI Brazil ETF (EWZ) experienced a sharp decline, plunging nearly 20% in overnight trading immediately after the election results were announced.
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Earlier in the month, analysts like Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, had projected a rally in both currency and bond markets if Bolsonaro had won, given his narrow lead. Now, the new Lula administration faces the critical task of convincing investors that Brazil can stabilize its debt trajectory. Alejo Czerwonko, a fellow at the Atlantic Council, suggests Lula's government will likely adopt a "gradual approach" to its fiscal framework, aiming to balance public investment and social spending.
Goldman Sachs analysts foresee "modest measures" to control government spending growth, coupled with further increases in an already high tax burden, while major structural reforms are deemed unlikely under the new leadership.
International reactions largely congratulated Lula's historic win. Peruvian former presidential candidate Keiko Fujimori, in a post on X, hailed Lula's victory as a "democratic day" for the Brazilian people. Uruguayan presidential candidate Orsi Yamandu also congratulated Lula over a call, referring to him as a "friend."
This significant political development in Brazil coincided with another major shift: Serbia's long-serving leader, Aleksandar Vucic, conceded defeat in a parliamentary election to a student-led opposition movement, ending 14 years of his leadership.
— Matthew Tan contributed to this report.
