Lula's government seeks to reassure markets: it will not revoke Brazil's labor and pension reforms

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Vice President Geraldo Alckmin assured this, reiterating that instead he will now promote a tax reform in the largest economy in Latin America

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Lula's government seeks to reassure markets: it will not revoke labor and pension reforms of Brazil

Luiz Inacio Lula da Silva (REUTERS/Adriano Machado)

President Luiz Inácio Lula da Silva has no intention of repealing Brazil's labor and pension reforms, market-friendly measures passed by Congress in 2017 and 2019, Vice President Geraldo Alckmin.

Alckmin's statements are in line with comments by Lula's chief of staff, Rui Costa, who earlier this month scrapped plans to review the previous government's economic reforms after markets plunged on fears that could happen.

“Lula has been saying that he is not going to revoke the labor reform or the pension reform. What you can do is perfect them,” the vice president said at an event organized by the Federation of Industries of the State of Sao Paulo (FIESP), specifically mentioning mobile app workers.

Alckmin, who is also Lula's Minister of Industry and Commerce, reiterated that the government will now promote a tax reform in the largest economy in Latin America.

“ Our goal is to go ahead with the third reform – after the pension and labor reforms, the tax reform,” Alckmin said.

He added that the Lula government plans to end the tax IPI that taxes industrial goods. “Tax reform is essential for the industry.”

The hordes of supporters of former Brazilian President Jair Bolsonaro who invaded the main government buildings in the capital were a reality check for investors in Latin America's largest economy.

Peaceful transitions of power have followed elections since the end of the military dictatorship in 1985, but Brazil's political polarization is deepening and will challenge the newly inaugurated president after his narrow victory in October.

Lula's government seeks to reassure markets: it will not revoke Brazil's pension and labor reforms

Alckmin's statements are online with comments from Lula's chief of staff, Rui Costa (Photo by EVARISTO SA/AFP)

“Baffling for investors” is how T. Rowe Price portfolio manager Samy Muaddi described events in Brasilia on Sunday, when Bolsonaro supporters invaded and vandalized congressional buildings, the presidential palace and the Supreme Court.

“This is likely to be a temporary matter and the results of the investment will be determined by the economic policy trajectory of the Lula government and broader global financial conditions,” Muaddi said.

Far from ignoring the challenges Lula faces to control the risks of this shock, investors and analysts said, however, that the focus remains on fiscal issues when evaluating the new Government in the long term.

“Lula will work to unify a coalition in Congress to pass laws, but will be careful not to damage his popularity with unpopular fiscal measures, potentially delaying the timetable for announcing fiscal adjustment measures,” he told the Reuters< news agency. /i> Katrina Butt, senior Latin America economist at AllianceBernstein LP in New York.

Butt said lower inflation It could allow the central bank to start cutting rates in the second half of the year, further boosting the economy, “but this is also connected to the new fiscal framework. If the new parameters are considered weak by the market, it could renew fears of fiscal dominance and prevent the BCB from easing”.

Discussions on the new fiscal framework are key under the Lula administration, after those responsible for monetary policy have highlighted the inflationary risks derived from the proposal to spend 168,000 million reais (32,000 million dollars) of the left-wing president to fulfill campaign promises .

“Due to the rapid government response, the impact on the market has been limited,” Elizabeth Johnson, managing director of Brazil research at TS Lombard, wrote in a note, adding that the violence over the weekend “could ease the pressure on Lula to presentan economic plan in the coming weeks and also slow down the reform agenda”.

(With information from Reuters)

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