Lula, Bolsonaro in Dead Heat as Brazil Prepares to Vote

The forthcoming Brazilian presidential and legislative elections, set to take place on October 4th, are of significant concern to investors across Spain and the region. This is due to the fact that Brazil is the largest source of investment for Spanish firms in Latin America, with exposure of over €40 billion. Major Spanish companies such as Santander, Telefónica, Iberdrola, Naturgy, Mapfre, and Indra are closely monitoring the outcome of these elections, as they could lead to substantial fluctuations in the economy, currency, debt, and interest rates.

The candidates in the race are incumbent president Luiz Inácio Lula da Silva and challenger Flávio Bolsonaro. The election will also see the renewal of the entire Chamber of Deputies and two-thirds of the Senate. This is a crucial contest for investors, as the outcome could have significant implications for the financial market.

According to Jefferies, Brazil is a market driven by election forecasts, with investors viewing the elections as a binding referendum on the country's fiscal trajectory. If Lula wins, analysts anticipate more public spending and a widening deficit, raising concerns for bond vigilantes. Conversely, a Bolsonaro presidency is expected to bring budgetary constraints, potentially leading to a shift in the Brazilian real's value from 5.23 to 5.8 per dollar.

A change in the Brazilian political landscape could also have a significant impact on the earnings of Spanish firms operating in the country. For instance, Santander generated €1.952 million in first-half 2026 operating profit in Brazil (21% of total), Telefónica earned €2.215 million (38% of total), and Iberdrola generated €1.312 million (16%). A depreciation of the real by 1% would reduce Santander's equity by €141 million, while Iberdrola's capital could be diminished by €270 million due to a 5% devaluation of the real.

The uncertainty surrounding the election outcome means that a run-off election may be necessary on October 25th. Société Générale currently assigns a 50% chance of victory to Lula with a Congress against him, 45% to Bolsonaro, and only 5% to Lula with legislative power in his favor. Depending on the result, monetary policy could shift dramatically.

The central bank may lower interest rates to 11% under a Bolsonaro presidency, compared to 12.25%-13.75% under a Lula administration (currently at 13.75%). This could prove advantageous for Santander, as a more benign fiscal environment and lower interest rates could encourage credit growth and lower loan default rates.