Brazil’s real currency and the Bovespa (.BVSP) stock index lost about 4% on Thursday as Lula’s brief honeymoon with investors was soured by his public pledge to prioritize social spending over fiscal rectitude and delays in naming its financial group. Real losses rebounded on Friday, with the greenback closing the session down 1.24 after a volatile trading day. Shares rose more than 2%. Despite those gains, concerns remained, with investors calling on Lula to restore firm rules on public spending after outgoing President Jair Bolsonaro spent heavily during the pandemic and election campaign. Central bank chief Roberto Campos Neto, speaking at an event in Sao Paulo, said Thursday’s crash was the latest example of markets calling for fiscal discipline amid a challenging global backdrop of high inflation, low growth and little risk appetite. “I don’t know if this was a Liz Truss moment for Brazil, but it was a clear demonstration of the markets’ sensitivity to the fiscal issue,” Campos Neto said, referring to Britain’s former prime minister who resigned after the markets were punished. her push for unfunded tax cuts. Citigroup Inc. (CN) said in a report that investors may have been wrong to believe that Lula would pursue an orthodox fiscal agenda, adding that the bank decided to reduce its exposure to Brazil risks ahead of this reassessment. “The market seemed to be convinced that Lula would be fiscally orthodox. The latest news challenges that assumption,” Dirk Willer, head of emerging markets strategy at Citi Research, wrote late Thursday. Milton Maluhy Filho, chief executive of Brazil’s biggest lender Itau Unibanco ( ITUB4.SA ), said on Friday that a balance must be found between social spending and tidying up public finances. “We believe that fiscal responsibility and social responsibility should go hand in hand,” he said on a conference call. Investors, even allies of Lula, have also expressed concern over delays in naming his finance minister. Lula has said he will name the cabinet only when he returns from the COP27 climate summit in Egypt. Senator Simone Tebet, of the centrist Brazilian Democratic Movement (MDB) party, said the finance minister should be his first choice in the cabinet to make clear what his economic policies will be. “We need a finance minister to explain the president’s political thinking,” he told reporters. On Thursday, Lula tried to play down investor concerns. “The market is nervous about nothing. I’ve never seen a market as sensitive as ours,” said the president-elect, who takes office on Jan. 1. ($1 = 5.3449 reais) Lisandra Paraguassu and Marcela Ayres in Brasilia, Luana Maria Benedito and Angus MacSwan in Sao Paulo Our Standards: The Thomson Reuters Trust Principles.
