Dollar soars with spending proposal outside the ceiling and Lula’s speeches

The dollar soared more than 2% at the opening of the exchange market this Thursday (17), with the quotation reaching R$ 5.53. At 9:30 am, the spot commercial dollar advanced 1.80%, at R$ 5.48 on sale.

The move is a response to the new government’s proposal to breach the spending ceiling to pay for Bolsa Família and to statements by the president-elect, Luiz Inácio Lula da Silva (PT) about the reaction of the markets.

Speaking during a meeting with NGOs this Thursday, Lula defended breaking the spending ceiling as a “social responsibility” in order to finance social programs. At COP27, the UN climate conference taking place in Sharm el-Sheikh, Egypt, he participated in a meeting with Brazilian civil society.

“If I say that, will the stock market fall, will the dollar rise? Patience”, said Lula, adding that the fluctuation of indices does not happen “because of serious people, but because of speculators who are speculating every single day”.

On Wednesday (16), the Ibovespa index fell 2.58%, to 110,243 points, after having dipped more than 3% throughout the day. The spot commercial dollar advanced 1.52%, worth R$ 5.3840 on sale. The interest rate futures market also showed a strong rise. The DI rate (interbank deposits) for 2024 rose from 14% per annum.

The domestic financial market was pressured throughout the day by rumors about the name of the future Minister of Finance and the wait for a definition regarding the expenses that will be outside the spending ceiling in 2023.

In the evening, after the market closed, the vice president-elect, Geraldo Alckmin (PSB), presented the draft of the PEC (proposed amendment to the Constitution) of the Transition, which proposes to remove the Bolsa Família program from the ceiling permanently and open way to honor the campaign promises of the president-elect, Luiz Inácio Lula da Silva (PT).

The measure is considered necessary to avoid a social blackout next year, since the Budget proposal sent in August by the Jair Bolsonaro (PL) government only guarantees an average value of R$ 405.21 for beneficiaries, in addition to imposing cuts severe cuts in funds for housing and in the Popular Pharmacy.

Analysts explain that, by opening more loopholes to expand spending without a limitation such as that imposed by the spending ceiling, the government creates conditions for inflation to take a breather due to the increase in public money circulating in the market.

To control this inflationary pressure, the Central Bank may resume raising the country’s interest rate, currently at 13.75% per annum. High interest rates tend to cool the stock market, as investors turn to the gains offered by fixed income. This reduces the ability of companies to finance their projects, harming job creation.

In addition, the lack of control of public spending can make it difficult to implement the financial plan drawn up by the government. It is called fiscal risk. Investing in the country becomes riskier and investors take their dollars abroad, making the US currency more expensive here. This process generates inflation and requires even higher interest rates.

“The market continues to price fiscal risk with a sharp rise in future interest rates and penalizing risk assets with the devaluation of almost all stocks in the Bovespa index”, commented Leandro De Checchi, an analyst at Clear Corretora.

“By putting spending on social benefits outside the ceiling, the PEC creates unpredictability on fiscal policy and, with the fiscal in doubt, we immediately see the interest curve stress”, said Nicolas Farto, head of variable income at Renova Invest .

Rumors about the name of the future finance minister also influenced asset prices after the Reuters agency reported that former São Paulo mayor Fernando Haddad was Lula’s favorite at the moment.

There was speculation in the market that Haddad’s name could even be announced this Wednesday, according to Alexsandro Nishimura, a partner at BRA BS, which was not confirmed.

The domestic market also had its performance hampered by the downturn abroad, where investors on the New York Stock Exchange sold shares to receive the profits obtained in recent days. The S&P 500, the benchmark for the US market, fell 0.83%.