Brazil markets fall on Lula’s first full day in office

Brazil markets fall on Lula's first full day in office
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BRASILIA, Jan 2 (Reuters) – Brazilian markets delivered a withering verdict on leftist President Luiz Inácio Lula da Silva’s first full day in office on Monday, after he vowed to prioritize social issues and ordered an extension of the fuel tax exemption busting the budget.

Lula’s decision to extend the fuel tax exemption, which will deprive the Treasury of 52.9 billion reais ($9.9 billion) a year in tax revenue, was a harsh rebuke from his finance minister Fernando Haddad, a supporter of of the Workers’ Party (PT) who had said so. would not spread.

Haddad, who is seeking to allay market fears that he might not maintain fiscal discipline, took office on Monday and vowed to rein in 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 benchmark Sao Paulo stock index (.BVSP) it ended 3.06% down. Shares of the state oil company Petrobras (PETR4.SA) it fell back almost 6.45%.

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

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

Lula narrowly defeated far-right incumbent Jair Bolsonaro in October, turning South America’s largest nation back to the left.

On Monday, Lula instructed the ministers to reverse steps taken by the previous administration to privatize state-owned companies, including studies to sell Petrobras, the Post Office and the state-owned broadcaster EBC.

On Sunday, the signed a decree extending an exemption for fuels from federal taxes, a measure approved by his predecessor intended to reduce its cost in the run-up to the election, but which will deprive the Treasury of 52.9 billion reais ($9.9 billion) a year in tax revenue.

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

Gabriel Araujo Gracia, an analyst at Guide Investimentos, said Lula’s plans to increase social spending, expand the role of state banks and abolish a constitutionally mandated spending ceiling date back to the worst days of Workers’ Party rule.

“The policies remind us of the Dilma Rousseff government more than Lula’s,” Gracia said, referring to Lula’s hand-picked successor, who was ousted while in office. “His policies of hers led to Brazil’s worst recession since 1929.”

Lula, who lifted millions of Brazilians out of poverty during his first two terms, criticized Bolsonaro for allowing famine to return to Brazil and wept during his speech to supporters on Sunday as he described how poverty had risen again.

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

Lula begins his third term after persuading Congress to approve a social spending package with an increase of 170 billion reais for one year, in line with his campaign promises.

“The package ended up being larger than expected, with possible repercussions for public debt sustainability,” 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 South American presidents, including leftists from Argentina, Chile and Bolivia, as well as representatives from Cuba and Venezuela, and Vice President Wang Qishan of China.

On Twitter, Lula said he had received a letter from Chinese leader Xi Jinping expressing his desire to increase cooperation between the two countries.

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

The new president will also attend a wake for Brazilian soccer star Pelé, who died on Thursday at the age of 82 after battling colon cancer.

Lula will pay his respects and pay tribute to Pelé and his family on Tuesday morning, the president’s office said in a statement.

($1 = 5.3633 reais)

Reporting by Anthony Boadle, Marcela Ayres, and Gabriel Araujo; Edited by Matthew Lewis and Jonathan Oatis

Our standards: The Thomson Reuters Trust Principles.

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