Brazil: stock markets plummet due to fears about an increase in social spending

The Brazilian real it sinks more than 2% in early cash trading, above 5.50 units per dollar, while interest rate futures soared. The Bovespa stock index falls more than 2%.

Lula’s transition team proposed to lawmakers late on Wednesday the guidelines for a constitutional amendment that would establish an exemption from the spending limit to ensure welfare programs, but without establishing their duration.

Vice President-elect Geraldo Alckmin, who is coordinating the transition on Lula’s behalf, said Brazil’s congress would have the last word on the proposal.

Analysts at XP Investimentos said in a note that they believed Congress would work on a “much more limited” version of the project proposed by the transition team.

“Increasing signs of a deterioration in the current fiscal framework and a significant expansion in spending have been weighing on domestic financial assets,” they said, with local markets on a rollercoaster ride awaiting more details on Lula’s economic plans. .

Speaking at the COP27 climate summit in Egypt on Thursday, Lula downplayed market reactions to his proposals and repeated criticism of the constitutional limit on spending.

“The stock market will fall, the dollar will rise (against the real). Patience. The dollar does not rise and the stock market does not fall because of serious people, but because of those who speculate every day, ”he said. Meanwhile, Lula has yet to name an economy minister.

What about the dollar

The dollar shoots up more than 2% at the opening of the exchange market, with the price reaching R$ 5.53. At 09:30 am, the spot commercial dollar advanced 1.80%, to R$ 5.48 for sale.

The measure responds to the new government’s proposal to break the spending ceiling to pay for the Bolsa Família and to the declarations of the president-elect, Luiz Inácio Lula da Silva (PT), about the reaction of the markets.

In yesterday’s session, the Ibovespa index fell 2.58%, to 110,243 points, after falling more than 3% throughout the day. The commercial spot dollar advanced 1.52%, being worth R$ 5.3840 for sale.

The domestic financial market was under pressure throughout the day due to rumors about the name of the future Minister of Finance and the wait for a definition regarding the expenses that will be outside the spending ceiling in 2023.

In times of uncertainty about the direction of the economy, investors also assess that the yield on government bonds needs to be higher to offset the risk, putting even more pressure on the interest rate market.

“Interest rates rise with the idea that Brazil may have a fiscal problem due to the government’s intention to increase spending”, commented Piter Carvalho, chief economist at Valor Investimentos. “As the country wants to spend more, the investor charges a higher premium.”

“The market continues to assess fiscal risk with a strong rise in future interest rates and penalizing risky assets with the devaluation of almost all the shares in the Bovespa index,” said Leandro De Checchi, an analyst at Clear Corretora.

“By putting welfare spending outside the ceiling, the PEC creates unpredictability in fiscal policy, and with fiscal in doubt, we immediately see yield curve stress,” said Nicolás Farto, head of equities at Renova Invest. .

Brazil: stock markets plummet due to fears about an increase in social spending