Morgan Stanley Brazil Report Warns of Complacency Before Election

Brazil · ECONOMY

The bank sketches a bear case of a weaker currency and 18% long rates as Brasília finalizes the 2027 budget bill.

Morgan Stanley economists and strategists, including Ana Madeira, warned against ‘complacency’ with Brazil’s current economic policy in a report on the country and the October elections, Valor Econômico journalist Gabriel Roca reported on 25 August 2026. The Morgan Stanley Brazil team sketched a bear scenario in which the absence of a credible fiscal plan after the elections sends the dollar back to R$6 and 10-year nominal rates to around 18%.

The B3 stock exchange building in São Paulo; Morgan Stanley warns of investor complacency ahead of Brazil’s election.

Morgan Stanley Sketches Post-Election Bear Case

The report, signed by Morgan Stanley economists and strategists including Ana Madeira, argues that investors are being complacent about Brazil’s policy trajectory ahead of the October vote.

In the bank’s bear scenario, which assumes no credible fiscal plan after the elections, the dollar would return to R$6 (US$1 = R$5.14).

Ten-year nominal interest rates would climb to around 18% in that scenario. The Ibovespa stock index would fall to 130,000 points, a decline of 25%.

The DI rate for January 2029 would reach 16.50%. In the bank’s adverse scenario the Selic would rise to 15.5%, while its optimistic case has the policy rate falling to 9.75%.

In the bank’s benign scenario, by contrast, the dollar could fall to R$4.50 and January 2029 DI rates would return toward 11%.

Fiscal Credibility Is the Central Variable

The Morgan Stanley Brazil warning turns on a single condition: whether the government that emerges from the October elections presents a fiscal plan markets consider credible.

Without such a plan, the bank sees the currency, rates and equities all repricing sharply. With one, the current levels of the Selic and long-dated DI rates would look more sustainable.

The gap with the bank’s own benign case shows how extreme the bear scenario is: under a credible plan, the currency would strengthen and long rates would fall instead of jumping toward 18%.

The report, circulated as campaign positioning intensifies, puts pressure on all candidates to detail their fiscal intentions before the vote.

The bank’s message, as reported by Valor Econômico, is that current asset prices already assume an orderly fiscal transition that no candidate has yet spelled out in detail.

Durigan Presents 2027 Budget Figures

The warning landed a day after Finance Minister Dario Durigan presented figures for the 2027 budget bill, the PLOA, on 24 August. The bill is due to Congress by 31 August 2026 and will incorporate the new consumption-tax model, though the Selective Tax rate remains undefined.

The government targets a primary surplus of around R$73.2 billion (≈US$14.2 billion) in 2027, equivalent to 0.5% of GDP.

The April budget-guidelines bill, the PLDO, had projected a slightly higher target of R$73.6 billion (≈US$14.3 billion). The headline result is achievable only through R$65.66 billion (≈US$12.8 billion) in excluded expenses, including part of precatório payments and defense, health and education investment.

The underlying projection, without those offsets, is a surplus of just R$7.99 billion (≈US$1.6 billion), or 0.05% of GDP.

Minimum Wage Set to Rise in 2027

Durigan also confirmed the minimum wage is projected at R$1,741 (≈US$339) for 2027, an increase that feeds directly into pension and benefit spending indexed to the floor.

The gap between the headline surplus target and the underlying projection illustrates the fiscal engineering markets will scrutinize as the budget bill moves through Congress.

For the Morgan Stanley Brazil strategists, precisely this kind of arithmetic underpins the complacency warning: headline targets can mask a much thinner primary effort.

The 31 August deadline for the PLOA, and the October elections weeks later, will determine whether Brazil’s fiscal debate answers the bank’s bear case or confirms it.

How much of that engineering survives congressional debate will shape the rate and currency paths that the bank’s scenarios attempt to map.

Budget Deadline Meets Election Calendar

The timing tightens the link between the two stories. The budget bill must reach Congress by 31 August 2026, weeks before voters choose the administration that will have to execute it.

Markets will read the PLOA’s assumptions, including the R$65.66 billion (≈US$12.8 billion) in offsets, as an early signal of the fiscal effort the next government is prepared to make.

The still-undefined Selective Tax rate, which Durigan said the government will address later, adds another layer of negotiation with lawmakers in an election season.

Until a credible plan survives both the congressional calendar and the October vote, the Morgan Stanley Brazil bear case, a dollar at R$6 and long rates near 18%, remains the reference point for risk.

Frequently Asked Questions

Sources

• valor.globo.com
• www.brasil247.com

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