By Lisandra Paraguassu and Gabriel Stargardter
BRASILIA (Reuters) -Brazilian 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 establishing long-term fiscal rules or naming his top economic policymakers.
Brazil’s currency and benchmark Bovespa stock index 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 has said he aims to prioritize social spending over market concerns, coupled with a lack of clarity over his key ministerial appointments, have led to a stark reappraisal of his government-in-waiting. Investors have said they want Lula to restore firm rules for public finances after major outlays by current President Jair Bolsonaro through the pandemic and election season.
Brazil’s currency and the Bovespa stock index both fell over 3% after Lula said in a speech to lawmakers on Thursday that many expenditures considered government spending should instead be seen as investments, and questioned the priority given to parts of Brazil’s economic framework – including a constitutional spending cap that has been waived repeatedly under Bolsonaro.
“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 slid further on Thursday afternoon after the announcement of four economists aligned with the leftist Workers Party to handle budgetary 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 delivering an immediate, bruising response to nascent governments’ economic proposals, amid the global realities of high inflation, weak growth and low risk appetite.
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 in Colombia faced market routs in their early months in office.
Brazilian markets were already 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 insisted he would maintain fiscal discipline.
But increasingly, investors are calling 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 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 not yet designated his finance minister and said he would consider his Cabinet picks only after returning from the COP27 climate summit in Egypt next week.
His advisers are already discussing with lawmakers how to open room for more spending outside the spending cap in order to deliver on campaign promises, including a possible constitutional amendment.
“The signals indicate 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 resources come from and what will be the long-term adjustments,” Dan 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 PauloWriting by Gabriel StargardterEditing by Brad Haynes, Alistair Bell and Rosalba O’Brien)
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