Lula talked about expanding social spending and ending the honeymoon with the markets

Brasilia. – The short-lived honeymoon for the markets with the elected president of Brazil, Luiz Inacio Lula da Silva, appears to be over. After investors expressed concern about his desire to do so Boosting social spending without setting long-term fiscal rules or appointing those responsible for economic policy.

The Brazilian currency and benchmark stock index, the Bovespa, rose last week after Lula’s election victory, as fears of political volatility in Latin America’s largest economy dissipated.

But Lula’s statement on Thursday before the parliamentarians put an end to this enthusiasm: “Why are people forced to suffer to ensure such financial stability in this country?”asked the president-elect.

This suspension, along with the lack of clarity about his key cabinet appointments, led to a harsh reassessment of the future government.

real and indicator The Sao Paulo Stock Exchange (Bovespa) fell more than 3% and 4%, respectivelyThursday, investors demanded Lula restore strict fiscal rules after big payments to the incumbent Jair Bolsonaro During pandemic season and elections.

However, the president-elect’s transition team confirmed this Friday The Sao Paulo stock exchange returned to work “normally” on Friday after a sharp decline. “Today, all financial indicators and the dollar are back to normal, and I think it was a speculative move, and a very bad thing for the country,” said Gliese Hoffman, transition team coordinator and Labor leader.

Lula questioned the priority given to certain macroeconomic variables, including the constitutional spending cap that was repeatedly waived under Bolsonaro.

“Why talk about spending ceilings and not about social issues?”ask. “Why do we have an inflation target and not a growth target?”

These comments also deserve a warning on Friday from the head of the central bank, Roberto Campos Neto – who will hold office until December 2024 – who He categorically advocated the need for fiscal balance.

At an event organized by the CFA Society Brasil, Campos Neto said the country should be attentive to social problems but also to the financial balance, “Otherwise we will return to a world of uncertainty.”

The official stressed that the positive dynamics observed in the Brazilian inflation margin must be confirmed and will depend on the definition of the country’s financial anchor in the future.

Lula’s congressional team is negotiating space in the 2023 budget to fulfill the social commitments made in the campaign, in particular, Maintain an aid of 600 riyals (about $113) and raise the minimum wage above inflation.

in both cases, The financial rule imposed by law must be broken.

Before Lula’s statement, the markets were already looking at the announcement with concern Four economists allied to the left-wing Workers’ Party will deal with budget issues as part of Lula’s transition team, including former Finance Minister Guido Mantega.

“Mantega symbolizes a period of financial lack of controlPaula Magalhães, chief economist at consultancy AC Pastore y Asociados, explained, during the Dilma government, the deficit and debt growth.

The negative reaction to comments by Lula and his transition team is the latest example of investors’ immediate and forceful response to emerging governments’ economic proposals – as happened in Great Britain with the ephemeral government of Liz Truss – in a global world. In the context of high inflation, weak growth and low risk appetite.

“I don’t know if there was a Liz Truss moment for Brazil (on Thursday), but it was clear evidence of the markets’ sensitivity to the financial issue,” Campos Neto said.

Lola He has not appointed the economy minister yet, and said he will consider choosing his government only after returning from the COP27 climate summit in Egypt next week

His advisers are already discussing with parliamentarians how to open up space for more spending outside the spending cap, including what is possible Constitutional amendment.

Evidence is that the ethos of (the amendment proposal) is largely geared toward new public spending. At the moment, there does not appear to be a plan on where these resources will come from and what the long-term adjustments will be, Dan Kawa, chief investment officer at TAG Investimentos, wrote in a note to clients. “The signs are terrible,” he added.

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