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

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

BRASILIA, Nov 10 (Reuters) – Brazilian President-elect Luiz Inacio Lula da Silva’s brief honeymoon with financial markets appeared to be over on Thursday, as investors grew impatient with his desire to increase social spending without establishing long-term fiscal rules or name its economic leader. policy makers.

Brazil’s currency and benchmark Bovespa stock index (.BVSP), which surged last week as fears of political volatility eased after Lula’s election victory, plunged around 4% on Thursday on comments of Lula and details of his transition team.

The rout made it clear that many investors were done waiting for clarity on Lula’s key ministerial appointments or details on how he aims to stabilize Brazil’s public finances.

In a speech to lawmakers, Lula said he aimed to prioritize social spending over market concerns, argued that many expenditures considered government spending should instead be considered investments, and challenged question the priority given to certain parts of Brazil’s economic framework.

Investors have called on Lula to reinstate strict rules for public finances after current President Jair Bolsonaro’s heavy spending during the pandemic and election season.

Lula acknowledged the market reaction in comments to reporters later Thursday, but sought to downplay investor concerns.

“The market is nervous for nothing,” he said. “I’ve never seen a market as sensitive as ours. It’s funny that the market hasn’t been nervous with four years of Bolsonaro.”

Markets deepened the losses 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, in a difficult global context of high inflation, weak growth and 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 his address to lawmakers, Lula insisted he would maintain fiscal discipline. But he also questioned the priority given to parts of Brazil’s economic framework – including a constitutional spending cap 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?

Investors – who are clamoring for Cabinet picks or clear fiscal rules that show how Lula intends to conduct his policies – have not been impressed.

“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 consider his cabinet 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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