Luiz Inácio Lula da Silva scraped a narrow victory to return as Brazil’s president after convincing more than 60mn voters he was the man for the job.

His task now will be to persuade investors and financial markets, after a policy-light campaign and indications that he plans to ditch the pro-market model of defeated rival Jair Bolsonaro and restore the state to a bigger role in the economy.

“There are potentially a lot of tensions in what [Lula] has promised: higher welfare spending, higher investment but fiscal responsibility. Investors will need to see that Lula is committed to fiscal responsibility as much as the other pledges,” said William Jackson, chief emerging markets economist at Capital Economics.

The veteran leftwing politician had provided hints to investors that he would govern as a centrist, added Jackson. “But at some point he’ll need to show more concrete proof.”

Traders adopted a cautious stance after Sunday’s win over far-right incumbent Bolsonaro, preferring to wait for clearer signals from the president-elect about economic strategy and his choice as finance minister. Lula has said he would prefer a politician to a technocrat, with ally Fernando Haddad, a former mayor of São Paulo, and Alexandre Padilha, ex-health minister, among those in contention.

The Brazilian real climbed 2 per cent against the US dollar on Monday after an initial dip, while the local Bovespa stock index recouped early losses to trade up 1.3 per cent.

However, shares in state-controlled oil producer Petrobras — Brazil’s most valuable listed company — slumped 8.5 per cent, reflecting concerns about a possible change in its direction under the new government.

Lula, 77, has pledged to boost public spending, especially on infrastructure and social welfare, in order to spread prosperity after a decade of stagnating living standards. But he has inherited shaky public finances, with debt projected to reach almost 89 per cent of gross domestic product next year, and an economy forecast to slow sharply.

Pedestrians wait at a bus stop in Sao Paulo, Brazil
Lula has called for a rise in the minimum wage and pension payments © Victor Moriyama/Bloomberg

Investors now want details on how the veteran Workers’ party (PT) leader, who was Brazil’s president between 2003 and 2010, intends to balance extra expenditure with responsible management of the public accounts.

“Bondholders and equity investors are worried about what will happen to fiscal policy,” said Marcos Casarin, chief Latin American economist at Oxford Economics.

On the campaign trail, the former trade unionist offered the broad strokes of a vision putting the state at the centre of economic development.

Lula has called for a greater role for BNDES, the publicly controlled development bank, for state-run Petrobras to stop charging international prices for fuel, and for a rise in the minimum wage and pension payments.

One campaign insider said: “The meetings we’ve had with the financial sector have been productive and our ideas have been well accepted. I have the feeling they go away calm and satisfied.”

Not everyone agrees, with some mindful of how the last period of PT rule ended.

Pedro Jobim, chief economist at hedge fund Legacy Capital, said such proposals were not only “bad economic policy” but “the same policies which created conditions for the recession, impunity and chaos into which the PT dragged Brazil, leaving scars that will take decades to heal”.

A document published last week by Lula also pledged to improve public services such as healthcare and exempt low earners from income tax. But it was vague on how the government would pay for this.

“The letter was just a declaration of broad intentions with a long wishlist of aspirational things the government should do,” said Alberto Ramos, head of the Latin America economic research team at Goldman Sachs, adding it lacked detail on “how to responsibly fund many of the fiscally expensive campaign promises”.

However, many in the business and financial world are hopeful that Lula’s pragmatic approach can avoid the mistakes of Dilma Rousseff, his chosen successor in 2011. Her loose fiscal policy and interventionist meddling were blamed for pushing Brazil into a deep slump.

Lula has pointed to his own record to show he can be trusted to run Latin America’s largest economy. Tens of millions of Brazilians were lifted out of poverty thanks to a conditional cash-transfer programme put in place during his presidency. As the country rode a global commodities boom, his administration largely stuck to economic orthodoxy.

Storage tanks at a Petrobras refinery in Duque de Caxias, Rio de Janeiro state, Brazil
Lula has called for state-run Petrobras to stop charging international prices for fuel © Dado Galdieri/Bloomberg

Yet he will assume office on January 1 in very different circumstances. Growth in China, a major consumer of Brazilian raw materials, has cooled considerably, and the risks of a global recession are rising, as are interest rates around the world.

Following forecasts for GDP growth of 2.8 per cent this year, according to a central bank survey, expansion in output is predicted to fall to 0.6 per cent in 2023.

“He’s going to have to produce growth out of nothing,” said Mario Marconini, managing director at political consultancy Teneo. “It’s a really tall order . . . [Lula] hasn’t had to deal with that kind of thing before.”

Winning approval for next year’s budget from a fragmented parliament tilted to the right will be a challenge. Spending has already risen because of enhanced social benefits granted by Bolsonaro in an attempt to win re-election, which Lula has said he would honour.

The choice of finance minister will be crucial. Given the narrow margin of his win — he took 50.9 per cent of the vote on Sunday — Lula could opt for a moderate.

“A more market-friendly figure could be good news,” said Rafaela Vitoria, chief economist at Banco Inter. “On the other hand, someone defending more spending and more state intervention in the economy would not be well received.”

Additional reporting by Carolina Ingizza in São Paulo



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