Brazil Has Investors on Edge

New presidents usually start by trimming spending before loosening the purse strings toward the end of their term. But Brazil’s Luiz Inácio Lula da Silva is kicking off his government with a fiscal blast and asking investors to trust he’ll balance the budget later.

Even before his Jan. 1 inauguration, Lula secured congressional approval to spend an additional 168 billion reais ($32.4 billion) this year to deliver on campaign pledges. The money will fund expanded cash transfers to the poor; public-health programs; and pay increases for public workers. The extra spending will result in a budget gap equal to almost 2% of gross domestic product in 2023, before interest payments.

“These ideas are five centuries old, starting with Machiavelli’s The Prince: First you do the hard stuff, and then, if you plant the right seeds, the future will reward you,” says Arminio Fraga, a former central bank president who co- manages hedge fund Gávea Investimentos Ltda. “But we’re going in the opposite direction.”