Candidate Donald Trump’s victory for the White House has increased the spotlight on the spending cut package that the government of Luiz Inácio Lula da Silva (PT) is expected to release this week to balance public accounts. The measure is necessary to also calm the financial market and the rise in the dollar.
The Republican’s proposals for the economy promise to strengthen the American currency globally and boost the devaluation of the real that has already been happening due to the financial market’s dissatisfaction with the fiscal situation.
The dollar reached around R$5.90 last week, due to the PT government’s delay in presenting measures to cut spending.
With the signal from the Minister of Finance, Fernando Haddad, that the negotiations on the package were advanced, the financial market had calmed down and the dollar had retreated.
This Wednesday (6), after the Republican’s victory, the price opened again close to the historic high, at R$ 5.86. Throughout the day, the currency stabilized and reached R$5.678 at around 4:30 pm.
Haddad again contributed to the slowdown, when he stated in Brasília that the round of meetings between ministers to deal with fiscal measures is concluded. “The ministers are all very aware of the task that lies ahead,” he said.
Uncertainties in the financial market, however, remain. “The combination of Trump’s victory with a spending package that is not well received by the market is explosive”, assesses Sílvio Campos Neto, economist at the Tendências consultancy.
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Protectionism will impact exports
The program announced by the US president-elect is considered inflationary due to external tariffs and tax cuts.
If it is actually implemented, the Fed – the North American central bank – will be forced to keep interest rates high for longer to contain the spike in prices.
As a result, US public debt securities, Treasuries, will become even more attractive, causing the migration of resources there and strengthening the dollar in relation to other currencies.
Trump also says he is willing to raise import tariffs to protect American companies from foreign competition and attract investment in the country.
The Republican signaled that he would charge tariffs of 60% on Chinese products and 10% on goods from other countries.
“There is still a lot of uncertainty about the feasibility of this type of measure and whether they will actually be implemented by the new government”, assessed Bradesco, in a note. “In any case, its adoption would have upward effects on global inflation, lower allocative efficiency and lower growth in the world economy.”
The USA is Brazil’s second trading partner. Exports reached US$36.9 billion in 2023, or 10.9% of total exports, according to data from the Ministry of Development, Industry, Commerce and Services (Mdic).
The main Brazilian products exported to the USA, candidates for tariffs, are oil, iron and steel, cellulose, coffee and aircraft. All with a zero rate or, in the case of oil, below 10%.
If sales there decrease, the country will receive fewer dollars, increasing the currency’s exchange rate even further against the real.
Increases pressure on fiscal outlook
In this scenario, the financial market’s expectations regarding the internal fiscal outlook become more evident. “This environment of perception of higher interest rates, if consolidated, adds a layer of uncertainty to the dynamics of local public debt and, with a strong dollar, also to the real”, assessed Bradesco bank in a note. “For this reason, the package of fiscal adjustment gains even more importance”,
Roberto Padovani, chief economist at Banco BV, agrees that attention is now focused on the Lula government’s response. “After the electoral result in the United States, we have a government in Brazil that is under more pressure,” he says. “Therefore, something will have to be announced, quickly and with good quality.”
For José Alfaix, economist at Rio Bravo, the performance of the dollar against the real has reflected investors’ disbelief in what will come from the government. “There is a lot of “noise” derived from investor skepticism of government commitment [com o corte de gastos]”, it says.
If the adjustment were robust, highlights Alfaix, the appreciation of the real against the dollar would be immediate. “With a credible adjustment and a willingness to analyze the problems of chronic growth in mandatory expenses, we would certainly observe a relevant appreciation of the real”, he says. “The problem is whether this adjustment will actually happen, and whether it will be compatible with market expectations.”
If the measures are not seen by the market as satisfactory, economists predict a spike in the dollar’s price.
“If the Brazilian government does not improve this fiscal situation, the dollar could reach R$6”, says Volnei Eyng, CEO of the management company Multiplike. “To contain this rise, it is essential to control public spending and, if necessary, for the Central Bank to be more rigorous in relation to rising interest rates to provide compensation for currencies.”
Sidney Lima, CNPI Analyst at Ouro Preto Investimentos, believes in a worsening of investment flight without resolving public accounts issues in Brazil. “Between January and September, the country saw the outflow of more than US$52 billion, reflecting the investor concern about the government’s ability to meet its fiscal targets and control growing debt”, he recalls.
This happened despite the American interest rate reduction cycle, started in September by the Fed. Emerging countries, which have higher interest rates, generally benefit from the measure. This was not the case in Brazil, “due to fiscal and economic uncertainties”.
For Padovani, the market knows that the government will not provide an insufficient response to increase confidence in the stability of public debt.
“It should signal the stability of the fiscal framework just enough to calm the market. Still, many doubts will remain regarding the debt trajectory.”
Increased by the cycle of rising interest rates, the public sector’s gross debt is expected to reach 84.3% of GDP in 2026 and 90% in 2032, according to the median of projections collected by the Central Bank’s Focus bulletin.
The government’s strategy, highlights Padovani, is to avoid a scenario of an explosion in the dollar, demonstrating some reaction. “But, as the measures are weak, what he will achieve is to postpone the financial tension further down the line. The doubts and tension will increase as you get closer to the 2026 electoral calendar”, he states.
