Lula’s market lure fades after Brazil’s ‘Liz Truss moment’

BRASILIA, Nov 11 (Reuters) – There is growing investor pessimism that Brazil’s president-elect Luiz Inacio Lula da Silva will govern with fiscal discipline, as the country’s central bank chief likened a market selloff to a “Liz Truss moment for Brazil.” “

Brazil’s real currency and Bovespa stock index (.BVSP) both lost about 4% on Thursday as Lula’s brief honeymoon with investors soured over his public commitment to prioritize social spending over fiscal rectitude and delays in naming his economic team .

True losses were recovered on Friday, with the dollar closing the session at 1.24 after a volatile day of trading. Shares rose more than 2%.

Despite these gains, jitters remained, with investors calling for Lula to firmly restore rules on public spending after heavy spending by outgoing President Jair Bolsonaro during the pandemic and election campaign.

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Speaking at an event in Sao Paulo, central bank chief Roberto Campos Neto said Thursday’s crash was the latest example of markets demanding fiscal discipline amid a challenging global backdrop of high inflation, low growth and little risk appetite.

“I don’t know if it was a Liz Truss moment for Brazil, but it was a clear demonstration of the markets’ sensitivity to the fiscal issue,” Campos Neto said, referring to the former British prime minister who resigned after the markets were punished. her push for unfunded tax cuts.

Citigroup Inc. (CN) said in a report that investors may have mistakenly thought that Lula would pursue an orthodox fiscal agenda, adding that the bank had decided to reduce its risk exposure to Brazil in light of this reassessment.

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“The market seemed to have convinced itself that Lula would be fiscally orthodox. The most recent news now casts doubt on this hypothesis,” Dirk Willer, Citi Research’s head of emerging markets strategy, wrote Thursday evening.

Milton Maluhy Filho, the chief executive of Brazil’s biggest lender Itau Unibanco ( ITUB4.SA ), said on Friday that a balance must be struck between social spending and putting public finances in order.

“We think fiscal responsibility and social responsibility should go hand in hand,” he said on a conference call.

Investors and even Lula allies have also expressed concern about delays in naming his finance minister. Lula said he would only name his cabinet once he returns from the COP27 climate summit in Egypt.

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Senator Simone Tebet, from the centrist Brazilian Democratic Movement Party (MDB), said the finance minister should be his first cabinet choice to clarify what his economic policy will be.

“A finance minister is needed to explain the president’s political thinking,” she told reporters.

Lula tried to play down investors’ concerns on Thursday. “The market is nervous for nothing. I have never seen a market as sensitive as ours,” says the president-elect, who takes office on January 1.

($1 = 5.3449 reais)

Reporting by Lisandra Paraguassu and Marcela Ayres in Brasilia, Luana Maria Benedito in Sao Paulo, Writing by Gabriel Stargardter, Editing by Angus MacSwan, Andrea Ricci and Cynthia Osterman

Our Standards: The Thomson Reuters Trust Principles.

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