There is growing investor pessimism that Brazil’s president-elect Luiz Inacio Lula da Silva will govern with fiscal discipline, as the head of the country’s central bank likened the market selloff to a “Liz Truss moment for Brazil.” Brazil’s real currency and the Bovespa 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 integrity and delays in naming financial group. The Brazilian real recovered losses on Friday, with the dollar closing down 1.24 after a volatile trading day. Shares rose more than 2 percent. 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 the former UK prime minister who resigned after the markets. chastised her push for unfunded tax cuts. Citigroup Inc said in a report that investors may have been wrong to believe that Lula would pursue an orthodox fiscal agenda, adding that the bank had decided to reduce its exposure to Brazil risk ahead of this reassessment. “The market seemed to be convinced that Lula would be fiscally orthodox. The latest news casts doubt on that assumption,” Dirk Willer, chief emerging markets strategist at Citi Research, wrote Thursday night. 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 Simon Tebet, of Brazil’s centrist Democratic Movement party, said the finance minister should be the first choice of Lula’s cabinet to make clear what his economic policies will be. “It takes a finance minister to explain the president’s political thinking,” Tebbet told reporters. On Thursday, Lula tried to play down 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.
