Brazil’s President Luiz Inacio Lula da Silva reaffirmed his commitment to fiscal responsibility in a televised address on Sunday, his first national broadcast since winning a fourth term, and said he wanted to help bring down high interest rates. He stopped short of announcing any new measures to address investor concerns. “The trajectory of public debt and high interest rates concern me, which is why I reaffirm my commitment to fiscal responsibility, enabling sustainable social policies and the much-needed expansion of investment,” he said. “All of these efforts will be made while preserving fiscal rules.”
The framework he promised to preserve commits the government to primary budget targets while limiting real spending growth to 70 percent of any rise in revenues, with annual expenditure growth capped at 2.5 percent above inflation and a floor of 0.6 percent. Lula said a central goal of his next administration is to raise investment to more than 20 percent of gross domestic product in partnership with the private sector, and that his government would create the conditions for borrowing costs to fall.
The market context is why the wording matters. Lula’s victory on October 25, defeating Senator Flavio Bolsonaro in a surprise runoff turnaround, weakened the real, pushed up long dated interest rates and hit Brazil’s benchmark stock index, as investors worried he would not do enough to fix the public finances. Campaign pledges requiring additional spending raised questions about how they can be reconciled with rising primary surplus targets, and markets have also been unsettled by his decision so far not to name a finance minister or other key appointments.
The numbers he inherits are his own record as much as his predecessor’s. Gross public debt has risen by more than 10 percentage points during Lula’s current term, reaching 82.9 percent of GDP. The central bank last week halted its rate cutting cycle and kept borrowing costs at 13.75 percent amid a deteriorating inflation backdrop, and household indebtedness stands at a record equivalent of 50.1 percent of income. Economists now expect rates to stay elevated for longer and have cut growth forecasts for next year.
What would change the market verdict is specific and still missing: a finance minister, and measures that show how the spending pledges fit inside the fiscal framework. Sunday’s address supplied neither, so the pledge functions as a statement of intent whose test is the appointment and the first budget decisions of the new term.