Lula’s honeymoon and the market ended with fears of a spending plan

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

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

But recent comments by Lula, in which he said that his aim to prioritize social spending over market concerns, coupled with a lack of clarity about his key ministerial appointments, have led to a good reassessment of the government-in-waiting. Investors have said they want Lula to restore strong rules for public finances after major spending by current President Jair Bolsonaro through 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 expenditures considered government spending should be seen as investments, and questioned the priority given to parts of Brazil’s economic framework – including constitutional ones. spending cap that has been waived several times under Bolsonaro.

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

The market slid further on Thursday afternoon after the announcement of four economists aligned with the leftist Labor Party to handle budget problems 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 sending a direct, bruising response to the nascent government’s economic proposals, amid the global reality of high inflation, weak growth and low risk appetite.

In Britain, former Prime Minister Liz Truss stepped down after markets shunned her plans for unfunded tax cuts, while leftist Latin American leaders Jibril Boric of Chile and Gustavo Petro of Colombia faced market defeats in their first months in office.

The Brazilian market has been reeling on Thursday, as inflation data showed that consumer prices rose more than expected in October after three straight months of declines.

In the speech, Lula also confirmed that he will maintain fiscal discipline.

But more and more, investors are calling to take the Cabinet or clear fiscal rules that show how Lula intends to implement the policy.

“In the past few days, the president-elect’s focus has been on signaling a major expansion in social spending, without a counterbalancing point about fiscal responsibility, which strikes a different tone than expected,” said Arthur Carvalho, chief economist at TRUXT Investimentos in Rio de Janeiro.

Lula has yet to appoint his finance minister and said he would consider his cabinet selection only after returning from the COP27 climate summit in Egypt next week.

His advisers have been discussing with lawmakers how to open up space for more spending outside spending limits to fulfill campaign promises, including possible constitutional amendments.

“Signals show that the spirit (of the proposed amendment) is very oriented around new public spending. For now, there seems to be no plan for where those sources come from and what will be the long-term adjustments,” Dan Kawa, Chief investment officer of TAG Investimentos, wrote in a note client. “The signal is terrible.”

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