Lula da Silva downplays fiscal concerns of investors; Brazilian markets fall

Brazil’s stock exchanges fell this Thursday as soon as the country’s elected president, Luiz Inácio Lula da Silva, redoubled his plans to increase spending, disregarding the concern of investors about the importance of fiscal discipline.

Brazil’s currency, the real, fell by more than one percentage point at the opening of the day, leading the declines of its counterparts in emerging markets, as soon as Lula da Silva had declared in the framework of the COP27 climate conference that his government should start the debate on “social responsibility instead of fiscal responsibility.”

His team’s proposal is that some R$175 billion (US$32 billion) of social spending are excluded for an indefinite period of the most important fiscal rule in Brazil, the so-called “spending ceiling”, which restricts the increase in public spending at the level of the inflation rate recorded the previous year.

“If the spending limit served so that we would not pay interest to the financial sector, and we would keep these social policies unaltered, there would be no problem,” he said. “However, what happens is that money is left for health, education, science, culture.”

The real weakened by 1.3% in the afternoon in São Paulo, recovering some losses after breaking the level of 5.50 units per dollar. The reference stock exchange index Ibovespa collapsed by 2.2%, while swap rates rose along the curve, and long term contracts gained more than 50 basic points.

Lula da Silva recognized that his comments could cause the loss of Brazil’s assets. “Pity,” he says, and added that the markets fall “not because of serious people, but because of speculators.”

Although Lula dismissed the concerns of investors, legislator Reginaldo Lopes, leader of the Workers’ Party in the lower chamber, tells journalists that he will meet with market participants in São Paulo later in the week.

HIGHER DEBT, HIGHER FEES

Investors, fearing that spending will fuel inflation, now think that the Central Bank will no longer be able to lower interest rates next year. Some even fear that those in charge of formulating policies have decided to renew an aggressive monetary adjustment cycle that already raised the Selic reference index to 13.75% this year.

The spending proposal “reduces degrees of the Central Bank freedom to manage monetary policy,” says Alberto Ramos, senior economist at Goldman Sachs Group Inc (GS). “In the best of cases, it could delay the delivery of rate clippings, but in the extreme it could also lead to the unfortunate situation in which the Central Bank would tend to raise rates again.”

Brazilian assets outperformed their peers during most of the year and remained relatively calm before the elections, given the expectation that neither Lula da Silva nor President Jair Bolsonaro would be fiscally irresponsible. But the state of mind has changed since the second electoral round on October 30, since Lula da Silva’s side continues to show more expenses and more delays in the announcement of the names of the cabinets.

The shares of the nation dropped more than 12% in dollars this month, with mucho, the worst among the main world indices. The real, which made the selections one of the best performers of 2022, is the worst in a basket of 31 main currencies followed by Bloomberg in November, with a drop of 5.4%.

Investors are now focusing on how the congressional proposal will be received.

“Our only hope is that Congressional leaders will stand up for themselves,” says Edwin Gutiérrez, Abrdn’s Head of Emerging Market Sovereign Debt.

With information from Bloomberg Línea/ Maria Eloisa Capurro

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