Brazil Markets Sink as Traders Mull Lula’s Plan to Beef Up State

(Bloomberg) -- Brazilian assets tumbled on the first session of 2023 as traders digested plans by President Luiz Inacio Lula da Silva to use state-owned companies to drive economic growth.

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Petrobras slumped as much as 6.9% in Sao Paulo, the main drag on the benchmark Ibovespa index, which fell 3.1% at the close. Lender Banco do Brasil SA dropped as much as 5.3%. Swap rates jumped across the curve and the real led losses among major currencies, down 1.4% with holidays in the US and UK thinning out liquidity in global markets.

At his swearing-in on Sunday, Lula reinforced his commitment to fighting inequality and hunger, bashed the current fiscal rules as “stupidity” and said public banks and companies including oil giant Petroleo Brasileiro SA will have “a key role” in the new economic cycle.

Lula Is Back in Brazil, Pledging Prosperity Driven by State

In his first hours back on the job, Lula signed a provisional measure that guarantees 600 reais ($112.17) a month for the Bolsa Familia aid program, removed companies such as Petrobras from privatization plans, revoked a decree that reduced levies for large companies and extended a tax break on fuels.

While Lula has criticized the current fiscal rule for months, the comments Sunday are sparking fresh concerns among traders, who worry the left-wing administration will erode fiscal accounts and fuel inflation. Policymakers have warned against an expansion of subsidized credit and a reversal of the labor reform, saying both measures could “reduce” the power of monetary policy.

A central bank survey of economists collected before the inauguration and released Monday already showed a fresh round of upward revisions to inflation estimates.

Lula Sees Brazil Inflation Forecasts Jump Under His Plans

Comments by other members of Lula’s cabinet are adding to concerns. On Monday, Finance Minister Fernando Haddad reinforced a pledge to present a new fiscal plan to congress in the first half of the year, but fell short of giving details. Jean Paul Prates, who was tapped to become Petrobras’s new chief executive officer, told newspaper O Globo the firm’s pricing policy will be changed.

“There was nothing reasonable in what Lula, Prates or Haddad have said,” according to Marcelo Ornelas, a portfolio manager at Kinitro Capital. “All the signals are bad.”

--With assistance from Davison Santana.

(Updates markets in second paragraph)

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