Lula chalks up economic track record

Lula's promises to rich and poor will be tested

Analysis
By Jeremy Scott-Joynt BBC News Online business reporter

A month has elapsed since new president Luiz Inacio Lula da Silva - better known as Lula - took office, promising to reshape Brazil for all its people rather than just the privileged few.

Financial markets are showing appreciation of Lula's financial orthodoxy - after running scared in the months before the election, worried by the tough rethoric of some members of Lula's Workers' Party.

The Bovespa stock market in Sao Paulo and the currency, the real, are both strengthening, and inflation is falling back from last year's highs.

And while the rhetoric continues to focus on ambitious anti-poverty plans - the reason two thirds of Brazilians voted for Lula in the first place - the bankers and corporate chieftains he put in charge of economic policy are cutting spending wherever they can.

On Friday the government announced it would keep spending in check to beat, and not just meet, the International Monetary Fund's 3.75% primary budget surplus target.

Old dogs, new tricks

Admittedly the old Brazil, of sky-high debt and reckless spending - not to mention gross corruption - is still around.

Much of the country's debts, totalling 56% of gross domestic product, come from the 26 states, and the southern state of Rio de Janeiro - home of the eponymous party city - on Thursday said it planned to default on a 90m real ($25.4m, £15.4m) payment it owes the government.

The decision came one day after a Brasilia court blocked a claim from Rio for 86m real in what the state had said were emergency tax transfers.

And in Paris, a US plane leasing firm has seized a Boeing 777 used by state airline Varig, because the lossmaking 75-year-old carrier has not paid its debts to the company.

High wire

But aside from that, things remain relatively positive.

Economists agree that there is a delicate tightrope ahead for former shoe-shine boy and metalworker Lula and his government.

He has yet to put a foot far wrong, with decisions such as the cancelling of a $700m order for new air force jets and the careful cultivation of allies in the country's fractious Congress.

And eye-catching moves such as flying to Europe on a commercial flight to save the taxpayer money are also making an impact.

But the honeymoon with the markets may not last that long, analysts warn.

"Lula is beginning to acquire credibility, but the process is far from being consolidated," said Paulo Leme, in charge of emerging markets at Goldman Sachs in New York.

"The demanding part will come, which is delivering the goods."

Keeping both the people - whose expectations are understandably high in a country where millions live on less than a dollar a day - and the financiers happy will be a test of both political skill and raw luck.