Lula's reelection raises fiscal alert and tests market confidence in a fourth term

The re-election of Luiz Inácio Lula da Silva opened a period of uncertainty for the markets. According to economist Rodrigo Viegas, guest on the podcast Os Sócios, presented by Bruno Perini and Malu Perini, the stock market crash and the circuit break recorded after the result express investors' distrust regarding the direction of the economy in the fourth term.

In Viegas' assessment, the message from the market was that we don't know which way the country will go. He states that agents are quickly awaiting a response from the government, and that expectations for a fiscal gesture, such as choosing a name for the economy or an adjustment package, have been circulating since the day before. The economist, however, says he is not optimistic.

The risk mechanism

Viegas describes a vicious cycle: when foreign investors distrust a government, they withdraw money from the country, the dollar soars, inflation is pressured, interest rates rise and the economy slows down. For him, the country is today "on the brink of the abyss", and the question is whether the government will "open the parachute" in time.

The economist considers that Brazil has an uncontrolled debt trajectory, which would require spending cuts and deindexation of the minimum wage. According to him, a relevant part of the public debt, around 50%, grows in line with the Selic, which takes away the relief that countries like Japan and the United States obtain with pre-fixed bonds. He also mentions that the country has already paid more than one trillion reais in interest this year and the previous one, and that international reserves no longer exceed debt in dollars.

Perini and Viegas remember the episode two years ago, when the dollar reached R$6.40 after the economic team signaled that it would not control the accounts. In the economist's view, the government only backed down when the pressure became excessive.

Interest, inflation and the Central Bank

Interlocutors point to other sources of inflationary pressure. According to Perini, diesel is held back by Petrobras, with a lag of basically 100% compared to international prices, with a barrel costing around US$100. When the price is released, he says, it will be "inflation in the veins". The presenter also says that inflation is at the target ceiling, around 4.5%, even with the highest real interest rates in the world.

The two highlight the role of Gabriel Galípolo, president of the Central Bank, who, according to them, maintained high interest rates to contain inflation and was criticized by Lula. For Viegas, the high interest rate is the pricing of Brazilian fiscal risk. Perini's concern is with the succession, in two years' time: a possible name indicated to reduce the Selic "at the stroke of a pen" could, according to him, bring a huge inflationary risk, as occurred during the Dilma government.

In Viegas' assessment, the economy has become dysfunctional: with the Central Bank slowing activity and the government stimulating growth through spending, cutting expenses could bring recession and continuing to spend could trigger inflation. He expects a "lukewarm" government, without a reform agenda in the style of Michel Temer's "bridge to the future".

Politics and the scenario ahead

Regarding the election, Viegas attributes the turnaround in the second round to the mobilization of the left on the internet and spending promises that, in his analysis, attracted lower-income voters. He assesses that the choice of Flávio Bolsonaro as candidate was wrong and that the rejection of the name limited the right in the second round. The elected Congress has a majority to the right, but the economist says he does not trust that parliamentarians will remain faithful to their ideological positions.

The debate left a conclusion: for the first time, in the presenters' reading, the account of fiscal imbalances tends to reach the government that created them. The full episode did not detail investment allocation recommendations.

Automatically translated from Portuguese.