Three days prior to Election Day, Luiz Inácio Lula da Silva launched a manifesto promising to conciliate fiscal and social responsibility. “A responsible fiscal policy must follow clear and realistic guidelines, compatible with tackling the social emergency we are facing,” the document said.
On Thursday, investors became worried that the balance Lula promised to strike will not be so balanced after all. During a speech in Brasília, the president-elect said he could not fathom making budget cuts to social programs “in the name of fiscal goals.”
Lula’s words put Schrödinger-esque doubts into investors’ minds. Will the next government be more on the side of austerity, as Lula was in his first presidential term, or will it allow public debt to balloon, as was the case under his handpicked successor, Dilma Rousseff?
Until clearer answers are provided, markets are set to be highly volatile.
Brazilian markets were a negative outlier in the Americas, having their biggest single-day drop in a year on Thursday. The currency lost 3 percent against the U.S. dollar, while the EWZ index in New York (composed of Brazilian equities) sank 3.5 percent. In addition, future interests went up by a percentage point on Thursday.
It was not all Lula. Risk aversion defined the trading session from the opening bell, after poor quarterly results from major companies and higher-than-expected inflation. But dips were accentuated after the president-elect spoke.
In his speech, the president-elect pointed out that “some things seen as spending in this country will come to be seen as investments,” while criticizing the cuts to social program budgets during President Jair Bolsonaro’s government.
“It is not possible for there to be a cut to [a medicine subsidy program] in the name of fiscal goals, of the ‘golden rule,'” Lula said, mockingly. The “golden rule” is a fiscal instrument stipulating that...
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