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Lula’s honeymoon in Brazil with investors ended before it started

Investors have resented his public commitment to prioritize social spending over fiscal integrity and delays in naming his economic team.

There is growing investor pessimism that Brazil’s president-elect Luiz Inacio Lula da Silva will govern with fiscal discipline, as the country’s central bank chief likened a market sell-off to a “Liz Truss moment for Brazil.”

Brazil’s real and the Bovespa stock index lost about 4 percent on Thursday as Lula’s brief honeymoon with investors soured by his public commitment to prioritize social spending over fiscal integrity and delays in appointing to your financial team.

The Brazilian real recouped losses on Friday, with the dollar closing the session down 1.24 after a volatile day of trading. Shares rose more than 2 percent.

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Despite those gains, nervousness remained, with investors calling on Lula to reinstate firm rules for public spending after outgoing President Jair Bolsonaro’s hefty outlays during the pandemic and election campaign.

Central bank chief Roberto Campos Neto told an event in Sao Paulo that Thursday’s defeat was the latest example of markets demanding fiscal discipline amid a challenging global backdrop of high inflation, low growth and little appetite for the risk.

“I don’t know if that 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 the former UK prime minister who resigned after markets he punished his drive for unfunded tax cuts.

Citigroup Inc said in a report that investors may have been mistaken in thinking Lula would follow an orthodox fiscal agenda, adding that the bank had decided to reduce its exposure to risk in Brazil in light of this revaluation.

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“The market seemed to have convinced itself that Lula would be fiscally orthodox. The latest news now casts doubt on this hypothesis,” Dirk Willer, head of emerging markets strategy at Citi Research, wrote Thursday night.

Milton Maluhy Filho, chief executive of Brazil’s largest lender Itaú Unibanco ITUB4.SA, said Friday that a balance must be struck between social spending and putting public finances in order.

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“We think that fiscal responsibility and social responsibility should go hand in hand,” he said in a conference call.

Investors and even allies of Lula have also expressed concern about delays in the appointment of his finance minister. Lula has said that he will only appoint his cabinet once he returns from the COP27 climate summit in Egypt.

Senator Simone Tebet, of the centrist Brazilian Democratic Movement party, said the finance minister should be the first choice in Lula’s cabinet to make clear what his economic policies will be.

“A finance minister is needed to explain the president’s political thinking,” Tebet told reporters.

On Thursday, Lula tried to downplay investor concerns. “The market is nervous about nothing. I have never seen a market as sensitive as ours,” said the president-elect, who takes office on January 1.

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