Lula’s honeymoon with markets ends amid spending plan fears

BRASILIA, Nov 10 (Reuters) – Brazilian President-elect Luiz Inacio Lula da Silva appeared short-lived and markets ended on Thursday, as investors grew impatient with his desire to boost social spending without setting long-term fiscal rules or appoint its chief economic policy.

Brazil’s currency and the benchmark Bovespa stock index (.BVSP) both jumped last week after Lula’s election victory, as fears of political volatility in Latin America’s largest economy faded.

But Lula’s recent comments, in which he said he aims to prioritize social spending over market concerns, coupled with a lack of clarity on his key ministerial appointments, have led to a strict re-evaluation of the government—wait for it . Investors have said they want Lula to restore firm rules for public finances after current President Jair Bolsonaro’s heavy spending during the pandemic and election season.

Brazil’s currency and the Bovespa stock index both fell more than 3% after Lula said in a speech to lawmakers on Thursday that many expenses considered government spending should instead be considered investments, and he questioned the priorities given part of Brazil’s economic framework – including a constitutional one. spending ceiling that has been repealed several times under Bolsonaro.

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“Why do people talk about the spending ceiling, but not social problems?” he asked. “Why do we have an inflation target, but not a growth target?”

Markets slipped further on Thursday afternoon after the announcement of four economists aligned with the leftist Workers’ Party to handle budgetary issues as part of Lula’s transition team, including former Finance Minister Guido Mantega.

The negative reaction to Lula’s comments and the transition team is the latest example of investors giving an immediate, bruising response to the government’s economic proposals, amid the global realities of high inflation, weak growth and low risk appetite.

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In Britain, former Prime Minister Liz Truss resigned after markets shunned her plans for unfunded major tax cuts, while leftist Latin American leaders Gabriel Boric of Chile and Gustavo Petro of Colombia faced market turmoil in the first month are in the office.

Brazilian markets were already shaken on Thursday, as inflation data showed that consumer prices rose more than expected in October after three straight months of decline.

In the speech, Lula also stressed that he would maintain fiscal discipline.

But increasingly, investors are demanding cabinet picks or clear fiscal rules that show how Lula intends to make policy.

Arthur Carvalho, chief economist at TRUXT Investimentos, said, “In the past few days, the focus of the president-elect has been on signaling a large expansion of social spending, without a counterpoint on fiscal responsibility, which strikes a tone different than expected.” Rio de Janeiro.

Lula has yet to name his finance minister and said he would consider his cabinet choices only after he returns from the COP27 climate summit in Egypt next week.

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His advisers are already discussing with lawmakers how to open up room for more spending outside of spending limits to meet campaign promises, including a possible constitutional amendment.

“Signals indicate that the spirit of (the proposed amendment) is very oriented towards new public spending. For now, there is no plan for where these resources come from and what will be the long-term adjustments,” Dan Kawa, Chief Investment Officer TAG Investimentos, wrote in a client note. “The signals are terrible.”

Reporting by Lisandra Paraguassu in Brasilia, Gabriel Stargardter in Rio de Janeiro and Luana Maria Benedito in Sao Paulo Writing by Gabriel Stargardter Editing by Brad Haynes, Alistair Bell and Rosalba O’Brien

Our Standards: The Thomson Reuters Trust Principles.


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