Brazilian markets stumble on Lula’s first full day in office

BRASILIA (Reuters) – Brazilian markets delivered a harsh judgment on leftist President Luiz Inacio Lula da Silva’s first full day on Monday after he pledged to prioritize social issues and ordered an extension of a fuel tax exemption over a budget breach.

Lula’s decision to extend the fuel tax exemption, which would deprive the treasury of 52.9 billion reais ($9.9 billion) in fiscal income annually, was a stinging rebuke to his Finance Minister Fernando Haddad, a Labor Party (PT) loyalist who said so. It will not be extended.

Haddad, seeking to allay market fears that he may not maintain fiscal discipline, took office on Monday pledging to control spending. “We’re not here for adventures,” he said.

The markets seemed unconvinced.

The real currency lost 1.5% of its value against the dollar in afternoon trading, while the Sao Paulo stock market index lost ground. (.BVSP) It ended down 3.06%. Shares in the state oil company Petrobras (PETR4.SA) It fell around 6.45%.

In his inauguration speeches in Brasilia on Sunday, Lula pledged that tackling hunger and poverty would be the “hallmark” of his third presidency after two previous terms running the country from 2003 to 2010.

Financial analysts said that the start of Lula’s third presidency was in line with his campaign promises, and looked similar to previous PT policies that led to a deep recession.

Lula narrowly defeated far-right President Jair Bolsonaro in October, putting South America’s largest country back on a leftward track.

On Monday, Lula instructed ministers to reverse state-enterprise privatization steps taken by the previous administration, including studies to sell Petrobras, the post office and state broadcaster EBC.

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On Sunday, he signed a decree extending the fuel exemption from federal taxes, a measure passed by his predecessor aimed at lowering their cost in the run-up to the election, but which would deprive the Treasury of 52.9 billion riyals ($9.9 billion). year in financial income.

A decree published in the Official Gazette on Monday showed that the federal fuel tax exemption will last for a year on diesel and biodiesel and two months for gasoline and ethanol.

Gabriel Araujo Gracia, an analyst at Guide Investimentos, said Lula’s plans to increase social spending, expand the role of state banks and abolish spending caps stipulated in the constitution, date back to the worst days of PT rule.

“The policies remind us of Dilma Rousseff’s government, not Lula’s,” Gracia said, referring to Lula’s handpicked successor who was deposed while in office. Her policies led to the worst recession in Brazil since 1929.

Lula, who lifted millions of Brazilians out of poverty during his first two terms in office, criticized Bolsonaro for allowing hunger to return to Brazil, and wept during his speech to supporters on Sunday when he described how poverty has increased again.

Allies said Lula’s new social pronoun was the result of 580 days in prison, Reuters reported on Sunday.

Lula is ushering in his third presidential term after persuading Congress to pass an additional one-year social spending package of 170 billion riyals, in line with his campaign promises.

“The package ended up being larger than expected, with potential implications for the sustainability of public debt,” Banco BTG Pactual said in a research note.

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Lula spent his first day in office meeting with more than a dozen heads of state who attended his inauguration.

The meetings began with the King of Spain, and continued with the presidents of South America, among whom were the leaders of the left in Argentina, Chile and Bolivia, in addition to representatives of Cuba and Venezuela, and Chinese Vice President Wang Qishan.

On Twitter, Lula said he had received a message from Chinese leader Xi Jinping expressing his desire for increased cooperation between the two countries.

“China is our largest trading partner, and we can expand relations between our two countries,” Lula added.

The new president is also scheduled to attend on the eve of Brazilian football star Pele, who died on Thursday at the age of 82 after suffering from colon cancer.

The president’s office said in a statement that Lula would extend his regards and pay tribute to Pele and his family on Tuesday morning.

($1 = 5.3633 riyals)

(Reporting) By Anthony Bodel, Marcela Ayres and Gabriel Araujo; Editing by Matthew Lewis and Jonathan Otis

Our standards: Thomson Reuters Trust Principles.

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