Lula’s push to boost spending in Brazil upset markets

RIO DE JANEIRO — On the campaign trail, Luiz Inácio Lula da Silva promised to support massive welfare programs, raise the minimum wage and raise wages. health and education spending. Now, Brazil’s president-elect is trying to make good on that promise — and investors are showing concern.

Da Silva’s transition team on Wednesday night presented the Congress with an outline of proposals to remove the constitutionally imposed spending cap by creating a spread for welfare. Then, at climate talks in Egypt on Thursday, he reiterated that he did not care whether his plan to lead a socially responsible government could lead to jittery speculators selling out.

When trading opened Thursday, Brazil’s currency slid to its weakest level against the dollar since July and the benchmark Bovespa stock index fell more than 2.5%. Traders have started pricing in interest rate hikes next year instead of cutting, as da Silva’s proposal “confirmed (fiscal) risks that were previously just rumours,” said Sérgio Vale, chief economist at MB Associados.

On several occasions, da Silva has said that the market’s reaction may have been overblown and admitted that investors hold him to a different standard than incumbent President Jair Bolsonaro. He pointed to his record of generating inclusive growth while adhering to fiscal responsibility during his two previous presidential terms, from 2003 to 2010.

But the current state of the Brazilian and global economy is in stark contrast to the days of the commodity super cycle, and da Silva has more room to maneuver. In his final year in office, more than 21% of the executive branch’s budget was discretionary, compared to just 6.3% in 2023, according to a congressional report on next year’s budget.

Investors’ skepticism about his leftist Labor Party’s commitment to fiscal restraint has been reignited by the 2023 spending proposal, da Silva’s comments and his possible finance minister’s take, which has been floated in Brazilian news outlets.

“It is difficult to see positive points; I only see problems,” said Zeina Latif, an economist at the Gibraltar consulting firm, said of the spending proposal. He added that he regretted that the technocrats were not involved in its construction. “It is pure political talk, without expertise, without committing to reform, only asking for more,” Latif said.

The budget does not include funds to maintain the Brazil Aid welfare program at a monthly rate of 600 reais ($110). Under the terms of the proposed constitutional amendment, the entire program – estimated to cost 175 billion reais ($32 billion) – would be exempt from the spending cap. A further 18 billion reais will go to families with children, who will receive an additional 150 reais a month.

The market already expects a deficit next year, but at a level of 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 triggered cautious investors. On November 10, he delivered an impassioned speech in the capital, Brasilia, vowing to prioritize the fight against hunger regardless of market concerns.

“If when I finish this mandate, every Brazilian has coffee, lunch and dinner again, I will have fulfilled my life’s mission,” he said, while his voice choked up. He then criticized the market’s fixation on fiscal discipline, and said the time had come for a “new paradigm.” That day, the currency lost nearly 4% of its value against the dollar.

“There is no point in 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 you say that, the stock exchange will go down, the dollar will go up,” he said. “Be patient. Because the dollar doesn’t go up and the stock market doesn’t go down because of serious people, but because of speculators.”

Da Silva’s proposal must pass both chambers of Congress before the end of the year in order to take effect in 2023. Senate President Rodrigo Pacheco, who traveled to Egypt with da Silva, said he supports eliminating welfare programs from spending. hat

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

The fear mostly comes from the office of his hand-picked successor, Dilma Rousseff, also from the Labor Party. During his two terms as president, he continued and expanded the da Silva measures, and Latin America’s largest economy plunged into its worst recession in a century.

Rousseff was eventually impeached for violating the fiscal responsibility law. The spending cap was introduced in 2016 by his successor to regain market confidence.

“People see Lula as if she were Dilma,” Brazilian economist and Johns Hopkins University professor Monica de Bolle said, referring to da Silva by her nickname. “But Dilma does not listen to anyone. Lula is the opposite: He is a political animal, not a technocrat. More than anything, Lula is very pragmatic.”

Da Silva’s choice for vice president speaks to this approach: Geraldo Alckmin, a former center-right rival, is a three-term governor of Sao Paulo state, Brazil’s economic powerhouse.

Henrique Meirelles, the former central bank president and finance minister who is the most outspoken advocate of creating a spending cap, has also backed da Silva’s efforts to secure permission for additional spending to cover welfare aid.

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

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