Lula's honeymoon with the markets ends amid spending plan fears

Lula’s honeymoon with the markets ends amid spending plan fears

BRASILIA, Nov 10 (Reuters) – Brazilian President-elect Luiz Inacio Lula da Silva’s short-lived honeymoon with the markets appeared to end on Thursday as investors grew impatient with his desire to increase social spending without setting rules long-term budgets or appointing its main economic decision-makers.

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

But recent comments by Lula, in which he said he aimed to prioritize social spending over market concerns, coupled with a lack of clarity over his key ministerial appointments, have led to a sharp reassessment of his position. pending government. Investors have said they want Lula to reinstate strict 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 challenged question the priority given to parts of Brazil’s economic framework – including a constitutional spending cap framework that was repeatedly removed under Bolsonaro.

“Why do people talk about spending limits, but not about social issues? ” He asked. “Why do we have an inflation target, but not a growth target?

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

The negative reaction to comments by Lula and the transition team is the latest example of investors responding immediately and murderously to the economic proposals of nascent governments, amid the global realities of high inflation, a low growth and a low appetite for risk.

In Britain, former Prime Minister Liz Truss resigned after markets rejected her plans for unfunded tax cuts, while left-wing Latin American leaders Gabriel Boric of Chile and Gustavo Petro in Colombia made faced market routs during their first months in office.

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

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

But increasingly, investors are demanding Cabinet picks or clear budget rules that show how Lula intends to conduct his policies.

“In recent days, the president-elect has focused on signaling a major expansion in social spending, without offsetting fiscal responsibility, which takes on a different tone than expected,” said Arthur Carvalho, chief economist at TRUXT Investments in Rio de Janeiro.

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

His advisers are already discussing with lawmakers how to pave the way for more spending outside the spending cap to deliver on campaign promises, including a possible constitutional amendment.

“The signals indicate that the spirit of (the proposed amendment) is very much geared towards new public spending. At the moment, there does not seem to be a plan as to where these resources come from and what the adjustments will be. long-term,” said Dan Kawa, TAG Investimentos’ Chief Investment Officer, wrote in a client note. “The signals are terrible.”

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