Lula's playbook: slower and steadier
President Luiz Inácio Lula da Silva, an 81-year-old leftist in his fourth and final term, is favoring incremental adjustments rather than sudden cuts. The working target is a primary surplus of 1.5% of GDP by the end of the term, with primary meaning the balance before interest costs.
That goal is shy of what investors are pressing for. Their wish list includes ending real minimum wage increases and tightening the cap on public spending growth. People involved in the talks say Lula believes a sharp turn would undercut the platform that returned him to power and does not want to end his presidency accused of the kind of electoral betrayal critics pinned on Dilma Rousseff.
Lessons from Rousseff and the tools on the table
Rousseff campaigned against cuts, then pivoted after her 2014 win by tightening fiscal policy and appointing a finance minister welcomed by markets. Support cratered, and she was impeached less than two years later. That episode, while not the sole cause of her downfall, is shaping Lula's approach a dozen years on.
The leading proposal would expand the share of the federal budget that can be frozen, giving the administration more room to control spending and hit targets. People familiar with the plans say the administration aims to boost the efficiency of social programs and rein in costs that outpace Brazil's fiscal framework.
Markets' patience and the post-runoff shock
Investors are clamoring for action while the nominal deficit sits close to 10% of GDP and public debt reaches an all-time high. During the campaign, Lula worsened the fiscal outlook by authorizing billions of dollars in extra spending on items such as fuel subsidies and credit, and he has offered no indication he will reverse course in the way markets want.
The stress showed when trading reopened after the Sunday runoff. On Monday, the real weakened, the Ibovespa slumped, and swap rates jumped after Lula's win caught off guard observers who had anticipated shifts in both the government and the fiscal course. Some members of his own team fear this stance could deepen investor mistrust, arguing that a worsening fiscal picture would lift inflation forecasts and weigh on growth projections.
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The pick that could steer expectations
Markets are watching who Lula taps as finance minister for the next term, since that choice will guide implementation. He has not indicated a pick yet.
Among names floated by allies is Rafael Fonteles, governor of Piauí and a former state finance secretary known for fiscal discipline, seen by some as able to reassure investors while aligning with Lula's politics. Current Finance Minister Dario Durigan, seen as a crucial go-between for financial markets, might also remain in the post. On Tuesday, Durigan said, "The president's government is committed to fiscal responsibility and stability," pledged clarity on achieving fiscal targets, and signaled that additional measures would be unveiled in the near future. Brazil's presidential palace declined to comment.
The bottom line: Lula is aiming to protect social spending while adding budget-freeze flexibility and tightening fast-growing costs to reach a 1.5% primary surplus by term end. Your read on Brazil risk will hinge on the finance minister choice and how quickly those promised measures land.
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