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 budget breaches.

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) decreased by 3.24%. Shares in the state oil company Petrobras (PETR4.SA) It fell nearly 6%.

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 Labor Party 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 path.

On Monday, Lula instructed ministers to cancel steps to privatize state companies taken by the previous administration, including studies to sell oil company Petrobras. (PETR4.SA)the post office and the state broadcaster EBC.

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 that 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 with Guide Investimentos, said Lula’s plans to increase social spending, expand the role of state banks and scrap the spending cap 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 ousted 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, 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 a social spending package, increasing the amount of 170 billion riyals for one year, 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.

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, as well as representatives from Cuba and Venezuela, and Chinese Vice President Wang Qishan.

($1 = 5.3458 Saudi riyals)

(Covering) Anthony Bodel, Marcela Ayres and Gabriel Araujo Editing by Matthew Lewis

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