{"text":[[{"start":6.3,"text":"The writer is head of research at Ashmore Group"}],[{"start":9.85,"text":"Brazilian elections rarely go without drama. In 2014, a leading contender died in a plane crash. In 2018, Luiz Inácio Lula da Silva was prevented from running after being jailed for charges that were later annulled and Jair Bolsonaro, the eventual winner that year, survived a stabbing. In early 2023, Bolsonaro’s supporters stormed the capital after he lost in the 2022 elections."}],[{"start":35.55,"text":"When Brazil goes to the polls on October 4, there will be at least one predictable outcome though — whoever wins will have to face up to the need for fiscal consolidation. The economics will probably be unforgiving."}],[{"start":49.199999999999996,"text":"Bolsonaro is ineligible to run after being imprisoned for plotting a coup but has anointed his eldest son, Flávio Bolsonaro, as a candidate to run against Lula. The two frontrunners head into the elections with high disapproval ratings, with one poll indicating 53 per cent of voters would never vote for Flávio Bolsonaro and 48 per cent for Lula."}],[{"start":70.64999999999999,"text":"That should open space for a third way candidate. But Tarcísio de Freitas, who might have been a possible contender, is instead running for re-election as governor of São Paulo. The main alternatives, Ronaldo Caiado, Renan Santos and Romeu Zema, all poll below 5 per cent. No one has won starting the race this low and so late: since 1989, every victor held at least 17 per cent vote intention by April."}],[{"start":99,"text":"Whoever wins will inherit a budget deficit near 8.5 per cent of GDP with more than 90 per cent of spending mandated by law. Fiscal consolidation is unavoidable. All that is in play is its size and timing. The debt maths leaves little room for delay in our view."}],[{"start":116.55,"text":"Gross public debt is close to 81 per cent of GDP, or about 68 per cent net of the country’s large foreign reserves. About half of the debt has an interest rate that floats according to the Selic policy benchmark. So a Selic base rate of 14.25 per cent is increasing the debt burden."}],[{"start":135.3,"text":"If there is only a slow, backloaded adjustment to this economic reality, inflation would remain elevated and rates would be in double digits. With borrowing costs above nominal growth, the snowball could carry net debt towards 75 per cent of GDP by 2030 and close to 90 per cent by 2035 — a path investors would be loath to finance."}],[{"start":null,"text":"
"}],[{"start":158.25,"text":"A credible four-year plan — including a freeze on public sector hiring and holding entitlements below nominal growth — would be a game-changer. This would likely draw investment inflows by boosting investor confidence in the country, support the real and anchor inflation, letting the central bank cut benchmark rates towards 8 per cent, still 5 per cent over its inflation target. "}],[{"start":181.05,"text":"If the primary budget surplus rose to 1 per cent in 2027, 1.75 per cent in 2028 and 2.5 per cent thereafter while nominal growth was near 6.5 per cent, net debt could stabilise around 68 per cent of GDP by 2030. "}],[{"start":200.15,"text":"Under former presidents Fernando Henrique Cardoso and Michel Temer, fiscal consolidation came at the price of anaemic growth. Recent reforms suggest Brazil can now expand at 2.5 to 3.5 per cent a year, making the task considerably easier."}],[{"start":217.5,"text":"The foreign investment position can be seen as fragile or resilient. Foreigners own more than 60 per cent of Brazilian equities, the highest share in emerging markets. This leaves the market exposed to bad news but also primed to squeeze higher, if locals rotate out of fixed income into equities. The reserves, in our opinion, are a genuine cushion too because they exceed the state’s foreign-currency debt. This means weaker real delivers a valuation gain that flatters net debt — a hedge few peers enjoy."}],[{"start":246.4,"text":"The catch is credibility. After winning in 2022, Lula did the bare minimum in tackling Brazil’s economic challenges, and the central bank was left to fight a Liz Truss-style bond sell-off in late 2024. Alas, there is no suggestion he has learnt the lesson. The likeliest road to reform with Lula, frustratingly, still runs through another bout of market volatility in 2027 to force the government’s hand."}],[{"start":273.5,"text":"For investors, that is a reason for engagement, not despair. Brazil trades at humbling valuations. It has some of the world’s highest real interest rates and the currency is at near record lows with the real down 70 per cent over the past 15 years despite an 8 per cent bounce over the past year. If it gets the sequence of economic management right — consolidation, disinflation, then building growth — the country is a compelling opportunity. "}],[{"start":302.55,"text":"Despite the tight bond maths and the disheartening election choices among the front-running candidates, betting on its collapse remains a mistake."}],[{"start":311.2,"text":"Ashmore is an investor in securities in emerging markets including Brazil"}],[{"start":323.45,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1784623779_5799.mp3"}