Brazil "turns out" better than expected. What to expect from 2026?

Economic and financial indicators reveal that Brazil performed better than expected in 2025. 2026 is an unknown, but it could be a pleasant surprise, even if greater volatility and tension are confirmed – the "prelude" to the presidential election . The positive variable ensuring optimism among investors is the indication of a credible fiscal adjustment for the post-election period.

Although slowing down, the economy could grow by 2.5% in 2025 and by up to 2% in 2026, contradicting initial forecasts. A favorable boost could come from indicators such as country risk, which plummeted 31.5% this year up to December 17th, and the dollar, which fell almost 11% in a scenario of persistent but declining inflation, below the target ceiling. By mid-2027, the indicator should be around 3.2% – very close to the central target if the dollar doesn't interfere. The Central Bank (BC) sees 3% growth only in 2028.

Driven by external markets, all eight maturities of future interest rates traded on the B3 stock exchange, up to 2035, fell by 13%, while the Ibovespa index soared by more than 30%. There is a consensus that the stock market's surge will not be contained. However, the escalating federal debt is causing apprehension among large investors. The realization is that public finances will undergo profound restructuring regardless of who is president.

With Congress and the Executive branch immersed in the election, major changes are unlikely to occur in 2026, partly because the economic team will be in a state of flux. Fernando Haddad's Finance Ministry will enter "interim mode" with his departure to collaborate with President Lula's campaign . In Planning, Minister Simone Tebet is expected to leave her post to run for the Senate or the governorship of São Paulo – a still unclear destination that could also apply to Haddad.

Two new directors will join seven others in leading the Central Bank – all appointed by Lula. Gabriel Galípolo will be the only "effective" member of the economic team, partly because his term transcends the current government and expires on December 31, 2028, thanks to the Central Bank's autonomy formalized by law. And if the Central Bank is already struggling alone to bring inflation to the target, in 2026 Galípolo may have double the work because, despite the limited space, fiscal expansion will continue to override monetary policy. This is the tone of the current government.

The sum of these strategically visible changes portrays the transition that the country will undergo from 2026 to 2027, which could increase the instability of financial assets, primarily exposed to the turbulence of the election campaign, depending on which candidate the opposition will choose to face Lula – currently the winner in both the first and second rounds against all the "opponents" on duty.

The year 2026 will be tense, yes, but not necessarily negative for Brazil, especially if the winds of the international market continue to blow in its favor, as they have this year, despite Donald Trump's "tariff hike." This "tariff hike" was eventually eliminated for hundreds of Brazilian products, but negotiations are ongoing and have "moved to a higher level"—with talks between Trump and Lula. A clear gain for Brazil.

Crisis in the "showcase"

Crucial for the economy in 2025 was the weakening of the dollar abroad, which affected the real and helped contain inflation. The IPCA (Brazilian consumer price index), which rose to 5.50% during the year, has already broken through the 5% support level and may even end the year within the target. However, it remains under close scrutiny from the Central Bank, as demonstrated by the Copom (Monetary Policy Committee) minutes and the Monetary Policy Report, making the Selic (benchmark interest rate) cut in January more uncertain. The minutes removed the risk of a Central Bank complacent with inflation and reinforced the institution's credibility.

For now, nothing indicates that the dollar will strengthen abroad in 2026. Weighing against the currency is the Federal Reserve's interest rate cutting cycle , which reduced its rate three times in 2025. The Fed may take a break in January, but the cycle will resume. From May to June, the presidency of the institution changes hands, and Jerome Powell's successor will be more aligned with Trump, who, like Lula, wants interest rates to fall so that the economy can get going, not just in first gear.

Falling interest rates and a weak dollar, coupled with external aid and despite significant volatility in 2026, could create a more constructive duo in 2027. However, the macroeconomic challenge remains: fiscal policy will need to be redesigned to curb the escalating debt.

“The deterioration of the accounts is evident, as maintaining primary deficits close to 1% of GDP will lead the Debt/GDP ratio to 84%. In this scenario, no monetary easing will change our predicament: Brazil has a date with budget constraints in 2027,” assesses Alexandre Mathias, chief strategist at Monte Bravo Corretora.

He understands that until the election reaches its decisive phase, low interest rates in the US and falling interest rates in Brazil should dictate the pace of the markets.

"Thus, the next 10 months still offer some breathing room due to favorable global liquidity, but Brazilian asset prices will depend on the credibility of the fiscal adjustment signaled by the winner of the 2026 election. This leaves the scenario binary and asymmetrical," he notes.

The strategist assesses that Brazil is on the cusp of fiscal dominance, which can be seen in the coupon rates of inflation-indexed NTN-B bonds that pay real interest rates close to 7%, a level technically incompatible with the stability of public debt in the long term.

In the recently released Monte Bravo Monthly Letter, Mathias states that the next president will inherit a fiscal time bomb. This scenario will require diagnosis, political will, and the ability to forge a pact between the three branches of government to achieve credible and politically viable primary surpluses, writes Mathias, who warns:

"Regardless of ideology, the elected official will need to seek adjustments before the debt triggers a crisis similar to that of 2014-2016, which fueled the worst recession in the country's history."