O MERCADO ESTÁ IGNORANDO O MAIOR RISCO DO BRASIL EM 2026

Episode Overview

• This episode features Carlos Woelz and Bruno Cordeiro from Kapitalo Investimentos discussing the macroeconomic outlook for Brazil, specifically focusing on the fiscal risks looming before and after the 2026/2027 electoral cycle.
• The conversation challenges the market's current complacency regarding Brazil's debt trajectory, arguing that the consensus view underestimates the potential for a fiscal crisis if the current government continues its expansionary policies.
• The guests provide a detailed analysis of why high real interest rates are currently failing to slow down the economy as expected and why a "market shock" may be the necessary catalyst to force the government into fiscal responsibility.

Key Concepts

• The Fallacy of the "Magic Debt Number": The discussion moves beyond the old economic theory (popularized by Rogoff and Reinhart) that there is a specific debt-to-GDP percentage (e.g., 90%) where an economy breaks. Instead, the guests argue that trajectory and reaction function are what matter. The danger lies not in the current level, but in the rapid speed of debt accumulation (growing 3-5% annually) combined with a government that lacks the political will to make the necessary, painful adjustments.

• Fiscal Expansion Neutralizing Monetary Policy: A central paradox discussed is why Brazil's economy hasn't slowed down despite extremely high real interest rates. The explanation is that the government is injecting money into the economy (fiscal expansion) at the same time the Central Bank is trying to remove it. This fiscal stimulus dilutes the contractionary effect of high rates on economic activity, leading to a scenario where inflation remains low and growth persists, masking the underlying deterioration of public accounts.

• The Risk of a "Lula 4" Scenario: The guests distinguish between the current market pricing and the likely reality of a second term for the current administration. They argue that without an external shock or severe market pressure, the government has no incentive to pivot toward fiscal responsibility. The market is currently assigning a 50/50 probability to a responsible pivot, whereas the guests see a high probability of continued fiscal deterioration to secure re-election, followed by a potential crisis.

• The "High Carry" Trap: In 2014, macroeconomic imbalances were obvious (high inflation, low growth), making it easy to bet against Brazil. Today, the situation is more treacherous for investors. Because current inflation is controlled and growth is positive (fueled by government spending), Brazilian assets appear to have attractive "carry" (yields). However, the guests argue these premiums are actually too low because they do not price in the explosive medium-term debt dynamics.

Quotes

• At 5:22 - "If you have to make a fiscal adjustment under pressure to decrease 3, 4, 5% of the GDP... the debt, you will have to increase taxes or cut spending at this level... First, it is a political problem... and the second is an economic problem: you cut spending in a magnitude that the positive effects of the fall in interest rates and the fall in risk premium do not fully compensate for the negative fiscal effects." - Carlos Woelz explaining the vicious cycle of delayed fiscal adjustments, where late corrections cause more damage than they fix.

• At 7:40 - "You will need pressure for this [fiscal adjustment] to happen. And pressure is worse for the market... it seems quite obvious that you have to have a significant worsening to change direction." - Carlos Woelz outlining the thesis that the government will not fix the fiscal path voluntarily; the market must force their hand through asset price deterioration.

• At 11:24 - "If I am bought in Brazil, I take a big hit. And if Lula is re-elected, it will be more of the same... What we are saying is that I think it won't be more of the same. You will take a big hit also if Lula wins." - Bruno Cordeiro clarifying that a continuity of the current government isn't a "neutral" event for markets, but likely a negative shock because the current debt path is unsustainable.

Takeaways

• Avoid Long Positions Based Solely on Carry: Investors should be cautious about holding Brazilian assets simply because the yield (carry) looks attractive. The current risk premiums in equity and credit markets are likely insufficient to compensate for the structural fiscal deterioration occurring in the background.

• Monitor Debt Trajectory Over Inflation: While inflation prints may look benign, the true health of the Brazilian economy is currently best measured by the speed of debt accumulation. If the debt-to-GDP ratio continues to grow at 3-5% annually without structural reform, a crisis becomes a mathematical probability rather than just a risk.

• Prepare for Volatility During the Election Cycle: Do not assume the 2026/2027 transition will be smooth or that a re-elected government will automatically pivot to the center. The base case should be that the government will increase spending to secure votes, and any shift toward fiscal discipline will only occur after the market punishes asset prices severely.