Brazil’s Lula faces setback as markets fret over spending, cabinet picks | U.S.

BRASILIA (Reuters) – Markets appeared to be giving Brazilian President-elect Luiz Inacio Lula da Silva his first clear setback as he advocated more room for social spending without setting long-term fiscal rules or appointing his top economic policymaker.

As he prepares to depart for the COP27 climate summit in Egypt on Monday before naming any cabinet members, Lula received criticism even from an ally for the delay in appointments.

Senator Simone Tebet, of the centrist Brazilian Democratic Movement party (MDB), said the economy minister should be his first cabinet pick to make clear what his policies are going to be affecting the economy.

“An economy minister is needed to explain the president’s political thought,” she told reporters.

Brazil’s currency BRBY and benchmark Bovespa stock index, which rose last week as fears of political volatility subsided after Lula’s election victory, plunged around 4% on Thursday on comments by Lula and details of his transition team.

Markets deepened losses after the announcement of four economists aligned with the leftist Workers Party (PT) to handle budgetary issues as part of Lula’s transition team, including former finance minister Guido Mantega.

The rout made clear that many investors want to see more clarity over ministerial appointments and how he aims to stabilize Brazil’s public finances.

“Lula is making a serious mistake by delaying key cabinet positions, especially who will be his economy minister,” said Andre Cesar, a consultant at Hold Legislative Advisors in Brasilia, adding Lula should name them immediately.

“That would be a very positive signal and put an end to the unnecessary noise that has arisen now on the market,” he said.

In a speech to lawmakers on Thursday, Lula said he aims to prioritize social spending over market concerns.

Investors have called for Lula to restore firm rules for public spending after major outlays by outgoing President Jair Bolsonaro through the pandemic and election campaign. Instead, Lula is pushing to dismantle old budget rules first.

After markets closed, a key lawmaker who had met with the transition team confirmed some investors’ fears that Lula wanted recurring exemptions from a constitutional spending cap.

Senator Marcelo Castro, the point man for the 2023 budget, said Lula backed not just a one-year waiver but a permanent spending cap waiver for the “Bolsa Familia” welfare program, which is slated to cost 175 billion reais ($32.7 billion)annually based on his campaign promises.

Lula, who takes office on Jan. 1, sought to downplay investors’ concerns. “The market is nervous for nothing. I have never seen a market as sensitive as ours,” he said.

($1 = 5.3449 reais)

(Reporting by Lisandra Paraguassu and Marcela Ayres in Brasilia, Luana Maria Benedito in Sao Paulo, Writing by Anthony Boadle, Editing by Angus MacSwan)