00:00Let's talk to Armando Castella. He's a professor of economics at the Federal University of Rio de Janeiro.
00:06Great to have you on Global Business Europe.
00:08Look, as we've been saying, the markets reacted sharply to Luna's win.
00:12How much of a challenge is he facing in winning back that investor confidence?
00:18Well, it's a big challenge. Obviously, the reaction that was put reflects the fact that the market expected Flava to
00:25win.
00:25That's what the polls were suggesting, that's what the analysts were suggesting.
00:30And that came as a big surprise that Lula won.
00:33For him, to regain confidence in the market is going to be a big challenge, both because his first term,
00:40his third term, in fact, is the one ending now,
00:43was a lot of expenditure increases, putting a lot of pressure on the central bank to raise interest rates and
00:50then putting the public debt on a very bad dynamic.
00:52As you also mentioned, people are really in debt companies too, so higher interest rates will mean more default rates,
01:01more problems across the economy.
01:04It'd be a big challenge.
01:05He has, during the campaign, said he's not supportive of running a primary surplus in the fiscal accounts.
01:12He says, as you put, in favor of expanding expenditures and raising taxes, maybe.
01:19But otherwise, there would be a lot of pressure on the interest rates and a very complicated dynamic, both for
01:24public debt and private debt.
01:26You see, he wants to boost that spending and living standards.
01:29But Bolsonaro was promising what some would argue would be a more market-friendly approach.
01:33How much room does Lula have to deliver?
01:38Well, I mean, as he showed you in the campaign, there's many ways that he can expand, you know, I
01:44mean, expenditures.
01:45He did a lot of that during the campaign.
01:47Now, he's facing a Congress that is controlled by the opposition, so that should put some limits on his ability
01:55to approve measures through Congress.
01:58And obviously, there's some limits on expenditures on the ability of the government to finance, because if it doesn't put
02:05some break on expenditures, doesn't decrease the pace it's going up, it would mean very developed exchange rates.
02:13There are a lot of pressure on food prices, on inflation, so popularity is going to decline very fast, no?
02:19So there's both a market limit and a congressional political limit by the fact that Congress controls, the opposition controls,
02:27especially the Senate, but also a majority in the lower house.
02:32But, again, as the experience has shown, there are many different ways that he can do it, increasing minimum salaries
02:39and so on.
02:41OK, so that's the domestic picture.
02:43But let's broaden this out a little bit and look at trading partners.
02:47I mean, China is the bigger trading partner for Brazil than the United States.
02:51How important is the relationship with Washington?
02:54And could trade become a source of tension?
02:58It may.
02:59It has been over the last year and a half.
03:03Flávio Bolsonaro was much more aligned with Washington than Lula is.
03:08Obviously, this, on the other hand, reduces pressure on the relationship with China and other partners.
03:15I think Flávio Bolsonaro won.
03:18I think the alignment with the U.S. would be much more dramatic, would be a really change in policy.
03:24But Washington, the U.S., it is an important partner, not only in trade, not as important as China, but
03:32also important, but also in finance and many different areas.
03:36No, I mean, access to the Internet, Starlink, and all this different means by which countries now relate to one
03:45another.
03:45So it's going to be a lot of tension, I believe, in the U.S.-Brazilian relationship.
03:50Armando Castela, thank you very much indeed.
03:54My pleasure.
