Brazil's Lula Is Coming Back and Investors Don't Like It One Bit

Critics: Recordings Show Rousseff Was Shielding Lula
  • Investors fear change in economic policy, drawn-out gridlock
  • Lula's 2008 stimulus policy won't work today, Schwartsman says

Brazil’s former president is back.

Luiz Inacio Lula da Silva’s appointment as President Dilma Rousseff’s chief of staff is rekindling concerns about changes in economic policies, similar to those investors had before he was first elected in 2002. Speculation the nomination was coming had fueled a rout in assets the past few days; stocks, bonds and the currency extended losses after the announcement on Wednesday before recovering later in the day.

Back in 2002, the fears proved unfounded -- Lula adopted an investor-friendly agenda and oversaw the fastest economic expansion in in a quarter century, a 500 percent stock surge and a 256 percent return in Brazil’s dollar-denominated bonds, more than double the emerging-market average.

So what are investors afraid of now? The answer may lie in 2008, according to former central bank director Alexandre Schwartsman, who is now a managing partner at Schwartsman & Associados. Lula, then mid-way through his second term in office, pushed for spending on stimulus measures to fight the global downturn -- and it worked, with Brazil being one of the last countries to feel the full impact of the financial crisis and one of the first to emerge from it.

Similar stimulus measures would likely fail in 2016, Schwartsman said. The economy was different in 2008, with falling public debt, a primary surplus, inflation under control -- none of which Brazil currently has.

The situation now is a lot different, Schwartsman said.

"This isn’t 2003. All it took then was a small sign, with the continuation of reforms, economic policy, and things would fall into place," Schwartsman said. Lula’s appointment also indicates that moves the government could undertake to shore up its fiscal accounts -- such as reforming the pension system -- aren’t on the table anymore, according to the former central bank director.

Investors are also turning cautious as Lula’s presence in the government could help shore up the administration and allow Rousseff to fend off efforts to impeach her, according to Vitor Suzaki, an analyst at brokerage Lerosa Investimentos.

"Sell Brazil. Period," Win Thin, the head of emerging-market strategy at New York-based Brown Brothers, said. "There is no positive spin for Lula coming aboard."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE