Brazil’s markets fell on the first trading day after President Luiz Inácio Lula da Silva’s reelection, putting renewed focus on debt, inflation and tight budget room before his Jan. 1 term.
At its peak, the dollar gained more than 12% against the real, reaching 5.60 reais, MercoPress reported. Trading in the Ibovespa was automatically suspended at Monday’s opening, and long-term interest rates rose by nearly two percentage points. MercoPress linked the market move to investor expectations that Sen. Flávio Bolsonaro would win on a platform of steep public-spending cuts. The dollar had closed Friday at 4.99 reais, while the Ibovespa finished at 205,082 points, near its record after the first voting round, the outlet reported.
Debt and fixed costs leave little room for maneuver. Public debt has climbed by more than 10 percentage points during Lula’s current term and is now above 82% of gross domestic product (GDP), MercoPress reported. Mandatory commitments leave officials able to adjust less than 8% of federal spending. Lula’s team has pledged to preserve the existing fiscal framework, including limits on spending growth and goals for primary surpluses. Above-inflation minimum-wage increases would also lift pension spending, while campaign benefits add further pressure, MercoPress said. EconoTimes previously covered the budget strain and conservative Congress confronting Lula.
Political constraints add to the budget challenge. Bolsonaro’s Liberal Party is set to hold the largest bloc in both chambers of Congress. MercoPress characterized the incoming legislature as Brazil’s most right-leaning since democratic rule resumed, and said its composition could complicate efforts to roll back tax exemptions and win approval for appointments to the central bank, regulators and Supreme Court.
Consumers and firms are also contending with high borrowing costs. September inflation topped the 4.5% tolerance ceiling, against a 3% target, MercoPress reported. Five successive cuts have brought the Selic to 13.75%. Credit bureau Serasa counts late payments among nearly 84 million people in Brazil and 9.3 million businesses, a record. MercoPress linked the arrears to high interest rates. MercoPress reported that the government is preparing to buy distressed mortgages from banks at a discount and forgive tax debts for small business owners; analysts cited by the outlet viewed both as temporary relief.
The Monetary Policy Committee is due to meet Nov. 4, with the real’s depreciation complicating the case for further rate cuts, MercoPress reported.
