Lula’s push to boost spending in Brazil rattles markets

RIO DE JANEIRO — During the election campaign, Luiz Inácio Lula da Silva promised to maintain a massive social welfare program, raise the minimum wage, and increase spending on health and education. Now Brazil’s president-elect is trying to keep his promises – and investors are getting worried.

Da Silva’s transition team presented to Congress on Wednesday evening the outline of a proposal to circumvent a constitutionally imposed spending cap by creating a welfare exclusion. Then, at the climate talks in Egypt on Thursday, he reiterated that he didn’t care if his plans to lead a socially responsible government might sell off nervous speculators.

When markets opened on Thursday, the Brazilian currency slipped to its weakest level against the dollar since July and the benchmark Bovespa stock index fell more than 2.5%. Traders have started pricing interest rate hikes next year rather than cuts as da Silva’s proposal “confirmed the (fiscal) risk that was previously only a rumour,” Sérgio said. Vale, chief economist at MB Associados.

On several occasions, da Silva said market reactions seemed overdone and claimed investors were holding him to a different standard than incumbent President Jair Bolsonaro. He highlighted his record of generating inclusive growth while upholding fiscal responsibility during his two previous presidential terms, from 2003 to 2010.

But the current state of the Brazilian and global economies stands in stark contrast to the heady days of the commodity super cycle, and da Silva has far less room to manoeuvre. In his final year in office, more than 21% of his executive branch’s budget was discretionary, up from just 6.3% in 2023, according to a congressional report on next year’s budget.

Investor skepticism about his left-leaning Workers’ Party’s commitment to fiscal restraint has been rekindled by the 2023 spending proposal, da Silva’s comments and his possible finance minister picks, which were broadcast in the Brazilian media.

“It’s hard to see positives; I only see problems,” Zeina Latif, an economist at consultancy Gibraltar, said of the spending proposal. She added that she regretted that technocrats were not involved in its development. “It’s a purely political conversation, with no expertise, no commitment to reform, just asking to spend more,” Latif said.

The budget does not include funding to maintain the Brazil Aid social assistance program at its monthly level of 600 reais ($110). Under the proposed constitutional amendment, the entire program – estimated to cost 175 billion reais ($32 billion) – would be excluded from the spending cap. An additional 18 billion reais would go to families with young children, who should receive an additional 150 reais per month.

The market had anticipated a deficit next year, but at a level about half that proposed, said Latif, who also criticized Bolsonaro’s repeated use of constitutional amendments to circumvent the cap.

Some of da Silva’s comments have raised investor suspicion. On November 10, he gave an impassioned speech in the capital, Brasilia, promising to prioritize the fight against hunger, regardless of market concerns.

“If at the end of this mandate, every Brazilian again had coffee, lunch and dinner, I will have fulfilled the mission of my life,” he said, his voice muffled. He then criticized the market fixation on fiscal discipline, and said the time had come for a “new paradigm”. On that day, the currency lost almost 4% of its value against the dollar.

“There’s no point thinking only about fiscal responsibility, because we have to start thinking about social responsibility,” da Silva said Thursday. He added that the spending cap takes money away from health, education, technology and culture.

“Ah, but if I say that, the stock market will go down, the dollar will go up,” he continued. “Be patient. Because the dollar is not going up and the stock market is not going down because of serious people, but rather because of speculators.”

Da Silva’s proposal will have to pass through both houses of Congress before the end of the year to take effect in 2023. Senate President Rodrigo Pacheco, who traveled to Egypt with da Silva, said that he supported the removal of the spending welfare program. cap.

Economists say da Silva’s first term, from 2003 to 2006, was marked by fiscal responsibility, even as his policies lifted tens of millions out of poverty. Spending increased during his second term, in response to the global financial crisis of 2007-2008.

The fears stem mainly from the tenure of his hand-picked successor, Dilma Rousseff, also from the Workers’ Party. During her two terms as president, she continued and expanded da Silva’s measures, and Latin America’s largest economy plunged into its worst recession in a century.

Rousseff was eventually impeached for violating fiscal liability laws. The spending cap was introduced in 2016 by its successor to regain market confidence.

“People look at Lula as if he were Dilma,” remarked Monica de Bolle, a Brazilian economist and professor at Johns Hopkins University, referring to da Silva by his nickname. “But Dilma didn’t listen to anyone. Lula is the exact opposite: he’s a political animal, not a technocrat. More than anything, Lula is very pragmatic.

The choice of Da Silva for the post of vice-president testifies to this approach: Geraldo Alckmin, a former centre-right rival, served three terms as governor of the state of Sao Paulo, Brazil’s economic powerhouse.

Henrique Meirelles, a former central bank president and finance minister who was the staunchest proponent of creating the spending cap, also backed da Silva’s efforts to gain permission for additional spending to cover maintaining the spending cap. welfare.

“The new government faces the challenge of negotiating a budget that clearly does not reflect the real needs of the country,” Meirelles said on Twitter on Tuesday.

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