Lula’s honeymoon with markets ends amid spending plan fears

BRASILIA, Nov 10 (Reuters) – Brazil President-elect Luiz Inacio Lula da Silva’s short-lived honeymoon with the markets appeared to have ended on Thursday as investors grew impatient with his desire to boost social spending without long-term set fiscal rules or name its top economic policy makers.

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

But recent comments by Lula, in which he said he aims to prioritize social spending over market concerns, along with a lack of clarity on his key ministerial appointments, have led to a sharp reassessment of his government-in-waiting. Investors have said they want Lula to firmly restore public finance rules after heavy spending by incumbent President Jair Bolsonaro throughout 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 much spending considered government spending should be seen as investment rather than the priority given given to parts of Brazil’s economic framework – including a constitutional spending cap that has been repeatedly waived under Bolsonaro.

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

Markets fell further on Thursday afternoon following 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 Lula’s comments and transition team is the latest example of investors making an immediate, bruising response to nascent governments’ economic proposals amid the global reality 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 major unfunded tax cuts, while leftist Latin American leaders Gabriel Boric of Chile and Gustavo Petro of Colombia faced market disruptions in their early 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.

Lula also insisted in the speech that he will maintain fiscal discipline.

But increasingly investors are asking for cabinet picks or clear fiscal rules that show how Lula intends to conduct policy.

“In the past few days, the president-elect’s focus has been on signaling a large expansion in social spending, without a counterbalance on fiscal responsibility, striking a different tone than expected,” said Arthur Carvalho, chief economist from TRUXT Investimentos in Rio de Janeiro.

Lula has not yet named 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 make room for more spending outside the spending cap to fulfill campaign promises, including a possible constitutional amendment.

“The signals are that the spirit of the (proposed amendment) is very much oriented around new public spending. For now, there seems to be no plan for where those resources will come from and what the long-term adjustments will be,” Dan said. Kawa, TAG Investimentos’ chief investment officer, 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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