Brazil Markets Plunge on Lula’s First Full Day in Office, According to Reuters

By Anthony Boadle

BRASILIA (Reuters) – Brazilian markets reacted negatively to leftist President Luiz Inacio Lula da Silva’s first full day in office on Monday, following his commitment to focus on social issues and the decision to extend a fuel tax exemption that is expected to significantly impact government revenue.

Lula’s choice to prolong the fuel tax exemption is projected to cost the Treasury 52.9 billion reais (approximately $9.9 billion) annually, which stands in stark contrast to the views of his finance minister, Fernando Haddad. Haddad, a loyalist of the Workers Party (PT), had indicated that such an extension would not occur.

Having assumed office on the same day, Haddad promised to uphold fiscal discipline. "We are not here for adventures," he stated, but market skepticism was evident.

The Brazilian real dropped 1.5% against the dollar during afternoon trading, while the key Sao Paulo stock market index plummeted by 3.06%. Shares of state-owned oil company Petrobras fell nearly 6.45%.

In his inauguration speeches in Brasilia on Sunday, Lula emphasized that addressing hunger and poverty would define his third term, following two previous presidencies from 2003 to 2010.

Financial analysts noted that Lula’s initial actions align with his campaign commitments and resemble earlier policies of the Workers Party, which contributed to a severe recession.

Lula narrowly defeated far-right incumbent Jair Bolsonaro in the October elections, shifting Brazil back toward leftist governance.

On Monday, Lula instructed his ministers to reverse privatization efforts undertaken by the previous government, including the proposed sales of Petrobras, the Post Office, and the state broadcasting company.

He signed a decree extending the fuel tax exemption for one year for diesel and biodiesel, and for two months for gasoline and ethanol, a continuation of a measure introduced by his predecessor to reduce fuel costs before the election.

Gabriel Araujo Gracia, an analyst at Guide Investimentos, commented that Lula’s plans to enhance social spending, increase the influence of state banks, and eliminate a constitutionally mandated spending ceiling echo the troubled policies of previous Workers Party leadership. He warned that these strategies could lead to negative economic consequences similar to those seen during Dilma Rousseff’s presidency, which resulted in Brazil’s worst recession since 1929.

Lula, who successfully lifted millions out of poverty during his earlier terms, criticized Bolsonaro for allowing hunger to resurface in Brazil and became emotional while recounting the increase in poverty in his speech to supporters on Sunday.

Supporters noted that Lula’s renewed focus on social issues may be influenced by his 580 days spent in prison.

Lula commenced his third term by persuading Congress to approve a 170 billion-real social spending package over one year, adhering to his campaign promises. Banco BTG Pactual observed that this package exceeded expectations, potentially impacting public debt sustainability.

On his first day, Lula engaged with numerous foreign leaders who attended his inauguration, starting with the king of Spain and continuing with leftist presidents from South America, as well as representatives from Cuba, Venezuela, and China’s Vice President Wang Qishan.

Lula announced via social media that he received a letter from Chinese leader Xi Jinping, expressing interest in strengthening cooperation between Brazil and China. "China is our largest trading partner, and we can further enhance relations between our countries," he stated.

The new president is also scheduled to pay his respects to Brazilian soccer icon Pele, who recently passed away at age 82 after a battle with colon cancer.

Lula will honor Pele and offer condolences to his family on Tuesday morning, according to a statement from the president’s office.