By Gabriel Araujo and Luana Maria Benedito
SAO PAULO (Reuters) -Brazilian markets slumped on Thursday after the incoming administration of President-elect Luiz Inacio Lula da Silva proposed exempting some 175 billion reais ($32 billion) from the spending cap on next year's budget to pay for welfare programs.
The drop came as Lula earlier in the day shrugged off market reaction to his proposals and again criticized the spending ceiling, saying the government could not only think about "fiscal responsibility" but also about "social responsibility".
The Brazilian real plunged more than 2% in early spot trading, weakening past 5.50 to the dollar before paring some losses, while interest rate futures jumped and the benchmark stock index Bovespa slipped roughly 2.4%.
Lula's transition team late on Wednesday proposed to lawmakers guidelines for a constitutional amendment that would set a spending cap waiver to secure welfare programs, though without establishing how long the waiver would last.
Vice President-elect Geraldo Alckmin, who is coordinating the transition on behalf of Lula, said it would be up to Brazil's Congress to give a final word on the proposal.
Analysts at XP (NASDAQ:XP) Investimentos said in a note that they believed Congress would work on a "much leaner" version of the draft as "growing signs of a deterioration in the current fiscal framework and a significant expansion in spending have been weighing heavily on domestic financial assets".
Lula, however, shrugged off market reaction while speaking at the COP27 climate summit in Egypt, reaffirming his call for a growth target in addition to inflation target and repeating criticism of the constitutional spending cap.
"The stock market will fall, the dollar will rise (against the real). Patience. The dollar doesn't rise and the stock market doesn't fall because of serious people, but because of those speculating every single day," he said.
Helder Wakabayashi, an analyst at Toro Investimentos, said that markets would remain pressured at least until the incoming government proposes a deadline for the spending cap waiver.
"Markets will not oppose something on the social side, but there has to be a counterpart. The current plan reaches almost 200 billion reais and there is no timeframe, so it sounds like something eternal," Wakabayashi said.
Lula has yet to appoint a finance minister. Reuters reported on Wednesday, citing sources, that he was seen favouring leftist former Sao Paulo Mayor Fernando Haddad for the job, though no final decision has been made.
($1 = 5.4935 reais)