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Monday, 28 October, 2002, 23:01 GMT
Markets slump on Lula speech
Lula da Silva
Silva has moderated his traditional left-wing stance
Brazil's financial markets have slumped following a speech from the newly elected president Luiz Inacio Lula da Silva.

Traders described his long-awaited speech as "lukewarm" but said they remained optimistic that with the presidential uncertainty over, calm would return to the markets.

Brazilian share prices fell to record lows earlier this year on fears that the man popularly known as "Lula" would revert to his left-wing roots on winning the election.

Brazilian currency traders
Where will markets go from here?
On Monday, the Sao Paulo Stock Exchange's Bovespa index closed down over 4.4% lower at 9,573. Since the start of the year, the index has lost almost 30% of its value.

Brazil's currency, the real, weakened by 1% to 3.77 per dollar from Friday's close of 3.73, albeit a recovery from steeper falls earlier in the day.

However, overall investors have come to terms with the idea of a Lula presidency. Last week, when his victory was seen as a certainty, the stock market of the world's ninth largest economy rallied nearly 20%.

The real, meanwhile, gained 5% in the two days before the vote, partially recouping a 40% decline since April.

Despite Monday's falls, market watchers predict that stability should soon follow.

US Treasury Secretary Paul O'Neill said: "I'm glad the uncertainty is over and from what I know of Lula, I think they are going to be okay."

Real promises

A stronger real would bring with it lower interest rates and debt repayment costs, leaving Mr da Silva with more money to fulfil his election promises.

In a press conference on Monday afternoon, Mr da Silva, who beat his rival Jose Serra with a 61% share of the vote and will take office in January, told reporters that he would respect his country's international financial commitments.

"As we said in our campaign, our government will respect contracts established by the (outgoing) government, will not lose control of inflation, and will maintain... a position of fiscal responsibility," he said.

He promised to make sustainable growth and job creation a priority - and assured foreign lenders that the country's $300bn (192bn) debt will not be rescheduled.

Much will now depend on who he chooses to advise him on the economy, a slate expected to be announced on Tuesday.

Calm please

"I believe calm will prevail in the market from now on," Mr da Silva said on Brazil's Globo TV after his victory.

There is no possibility of a restructuring of the debt

Guido Mantega
Lula's economic adviser

"Everyone knows it is not normal for the dollar to be worth four reals."

The markets were also reassured by suggestions that the central bank would be given more autonomy and that the new government would pay its debts.

"I only hope the market will act towards Brazil with the same seriousness with which we shall behave," Mr da Silva said.

But the markets will watch closely how quickly Mr da Silva outlines his policies, and who he appoints as finance minister and central bank governor.

Lula fears

Mr da Silva's Worker's Party had promised to renegotiate external debt in its previous three presidential campaigns, prompting fears that there would be a default on Brazil's $260bn public borrowings if he won.

But the party has since distanced itself from its earlier commitments.

"There is no possibility of a restructuring of the debt," Mr da Silva's economic adviser Guido Mantega said on Monday.

But the markets are still taking a wait-and-see approach.

What Latin Americans are bad administration of public funds, inefficiency and the famous issue of corruption

Eduardo Blasco, Maxinver consultancy

"Wall Street is looking to see if the Lula who takes office is the more moderate, forward-thinking person who appeared in this campaign or if he reverts to his life-long leftist stance," said David Roberts, senior international economist at Banc of America Securities.

"If he gives the right signals, there could be a significant recovery in Brazilian asset prices," he said.

People's voice

But Brazil's first working-class president warned the markets that they would not have it all their own way.

"The market should also be aware that Brazilians have to eat three times a day and that there are many people who are hungry, therefore we shall reconcile our relations with the market and with the Brazilian people."

"We shall keep in touch with all segments of society," he said.

Mr da Silva's first priority will be dealing with the country's financial crisis, and his promise to create millions of jobs.

His victory shows Brazil's disappointment with the free market policies of the outgoing government under which unemployment doubled.

"What Latin Americans are questioning is not capitalism as such," said Eduardo Blasco of Maxinver consultancy in Buenos Aires.

"What they are questioning is bad administration of public funds, inefficiency and the famous issue of corruption and ... income distribution," he said.

Brazil still has the fourth-widest gap between rich and poor in the world, according to UN figures.

Business support

The transition teams of the outgoing government and Mr da Silva's advisers are meeting this week, while the president and president-elect will meet in Brasilia on Tuesday.

The Brazilian Bank Federation (Febraban) has congratulated Mr da Silva and said it was willing to work with him.

"In accordance with the vision of Febraban, a country's healthy, ethical and efficient financial system is an essential condition for economic and social development," the influential banking group said.

Robert Faldini, Brazilian entrepreneur
We want Lula to complete tax reforms so that interest rates can be lowered

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28 Oct 02 | Americas
28 Oct 02 | Americas
24 Oct 02 | Business
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