Lula faces a fiscal reckoning after Brazil’s market rout

{"text":[[{"start":9.22,"text":"President Luiz Inácio Lula da Silva is under pressure to announce budget cuts as investor anxiety about the management of Brazil’s economy surges after the leftwing politician’s surprise re-election triggered a powerful market rout."}],[{"start":21.94,"text":"Concerns about the government finances under Lula led the Brazilian real to tumble 8 per cent against the US dollar on Monday in its worst day since 1999 and the benchmark Bovespa equity index to shed 13.9 per cent."}],[{"start":34.9,"text":"“A credible fiscal plan will require both better [tax] collection but also spending cuts,” said Pablo Riveroll, fund manager and head of Latin American equities at Schroders."}],[{"start":45.38,"text":"The real rose 1 per cent at Tuesday’s open to trade around R$5.36 to the dollar. Stocks were little changed in São Paulo."}],[{"start":54.7,"text":"Brazil has a large fiscal deficit of 9.5 per cent of GDP and elevated debt levels, which money managers and economists say are factors behind its high interest rates."}],[{"start":64.9,"text":"The unwinding of investor bets on a rival more business-friendly Flávio Bolsonaro administration also contributed to Monday’s sell-off, but giveaways the president promised during his re-election campaign fuelled market worries."}],[{"start":77.12,"text":"The measures, from debt forgiveness to increased welfare benefits, are estimated to involve about R$298bn ($55bn) this year, according to the Independent Fiscal Institute, a non-partisan body linked to the Senate."}],[{"start":91.22,"text":"“The social spending announced during the campaign does not have clear funding sources, let alone the funds to deliver a [budget] surplus,” Riveroll added."}],[{"start":99.46,"text":"JPMorgan’s analysts in a report on Monday said spending constraints alone would be “insufficient”."}],[{"start":104.42,"text":"“We believe delivering better fiscal results will require reforms to tackle rising pressures on mandatory expenditures,” it said, while acknowledging “hurdles” to presidential approval for such measures."}],[{"start":116.7,"text":"Mandatory items including social security and wages consume about nine-tenths of Brazil’s budget, leaving the government little room for manoeuvre without legislative changes."}],[{"start":null,"text":"

"}],[{"start":124.34,"text":"Lula, who ruled between 2003 and 2010, has expanded tax and spending during his current third term to stimulate economic growth. But critics say the loose fiscal stance has forced the central bank to maintain tight monetary policy, with its base rate at 13.75 per cent."}],[{"start":144.14,"text":"Economists say the budget shortfall must be reduced in order to prevent a further rise in debt, which at 83 per cent of GDP is relatively high for a developing country."}],[{"start":154.54,"text":"Bolsonaro had pledged to find cost savings of about 2 per cent of economic output. Lula’s team was considering a package of spending restraints in order to improve the debt trajectory and restore investor confidence, according to local media reports. The government did not respond to requests for comment."}],[{"start":173.74,"text":"Finance minister Dario Durigan said on Tuesday the administration was preparing new fiscal proposals in order to meet targets, without providing details."}],[{"start":182.82,"text":"A sustained recovery in the currency would depend on spending reductions and a “credible” path to stabilise public debt, rather than one-off measures or a mere “change in rhetoric”, said Thomas Haugaard, emerging markets debt portfolio manager at Janus Henderson."}],[{"start":198.5,"text":"“Attention now shifts to Lula’s economic team and fiscal plan,” he added. “Markets will look for credible appointments, political backing and a quantified, expenditure-led adjustment with congressional support.”"}],[{"start":211.58,"text":"A vital role will be the next finance minister. One name circulating within Lula’s Workers’ Party is Rafael Fonteles, governor of Piauí state. “The president is committed to balancing the public accounts,” he told local broadcaster GloboNews on Monday."}],[{"start":227.28,"text":"Despite Bolsonaro’s loss, sweeping rightwing gains in parliamentary elections earlier this month have given investors some hope that Congress may act as a check on profligate urges within the administration."}],[{"start":239.62,"text":"Leonardo Meira Reis at consultancy Eurasia Group said he expected Lula to propose a “modest” fiscal adjustment, but added: “We don’t think a first [spending cuts] package will be enough to appease markets.”"}],[{"start":256.6,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1793152599_7759.mp3"}