Brazil’s markets have improved despite mounting criticism of Lula’s plans

SAO PAULO (Reuters) – Brazilian financial markets rose on Wednesday even as criticism grew of President Luiz Inacio Lula da Silva’s economic policies, with analysts and a leading newspaper slamming ministers after markets plunged in the leftist’s first two days in office.

Brazil’s real currency and stock market rose after Lula’s chief of staff, Rui Costa, confirmed that the left-wing administration is not currently considering plans to review economic reforms.

Centrist Vice President Lula took over as development minister, with a pledge to seek re-industrialization. By midday, the Bovespa stock index (.BVSP) It rose 1% after falling nearly 5% in the early days of 2023.

The riyal fell 3.8 percent against the dollar in the past three sessions, its lowest level since July 2021.

Some of Lula’s aides have come under harsh criticism. Finance Minister Fernando Haddad was dubbed “Minister of Decoration” on Wednesday by his hometown newspaper O Estado de S. Paulo.

The Social Security and Labor ministers have also come under fire after hinting at revisions to investor-friendly pension reforms approved in 2019 and work procedures approved in 2017.

Haddad, a former Sao Paulo mayor who is scheduled to meet privately with Lula later in the day, took office vowing to restore public accounts and challenge the introduction of a credible fiscal framework after Lula’s giant social spending package was passed by Congress.

Lula said eradicating poverty and hunger would be the “hallmarks” of his government, raising fears among investors of rampant spending.

Markets reacted poorly to Haddad’s early days in office, especially after Lula ordered an extension of the fuel tax exemption that Haddad had publicly opposed.

“Haddad knew on his first day in office that he would be a zen character, a kind of work on a mission for President Lula,” the conservative daily known as Estadao said in an editorial, adding that Haddad had “lost his credibility” and must learn to say “no” to Lula. .

Citi analysts said that although Lula and Haddad’s first speeches in office were consistent with the baseline scenario, both appeared less pragmatic and materially responsible than first thought.

“Overall, they give the impression of deaf government — at least in terms of the kinds of tones financial markets want to hear,” BMO Capital Markets forex strategists told clients, adding that their comments could lead to a situation where “inflation will reaffirm And interest rate cuts will be out of the window.”

reverse reforms?

Costa’s remarks on Wednesday sought to assuage investor concerns raised the day before by Lula’s social security and labor ministers.

Minister Carlos Lupe stunned the market with his comments that the country’s social security system is not in deficit. Treasury figures show a cumulative deficit from January to November of 267.9 billion riyals ($49 billion). Lupe also said Lula’s government would need to review the investor-friendly pension reform approved by the Jair Bolsonaro administration.

Criticizing the 2017 labor reform approved under former President Michel Temer, Labor Minister Luiz Marineau said the new administration will prioritize regulating labor relationships created through mobile apps and digital platforms.

Analysts at Guide Investimentos said their observations show the government is still “on the way to reversing the liberal reforms of the last two presidents”.

“There is no proposal under consideration to review reforms at the moment, including the pension reform,” Costa told reporters on Wednesday. Costa spoke after an event marking the inauguration of Vice President Geraldo Alcmene as Minister of Development, Industry and Trade.

Alkmen, a longtime centrist, said his ministry would have the state-run BNDES Development Bank under its wing, noting that it was necessary to strengthen the bank’s role amid the country’s search for re-industrialization.

He added that it would be important for BNDES to “make an effort to lower interest rates on loans”.

($1 = 5.4797 riyals)

(Reporting by Gabriel Araujo) in São Paulo. Additional reporting by Marcela Ayres and Bernardo Karam in Brasilia. Editing by Nick Zieminski and Frank Jack Daniel

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