Brazil Finance Chief’s Star Fades as He Faces Worst Moment of Tenure

(Bloomberg) -- After 18 months walking a delicate tightrope between a president who wants to spend and investors demanding fiscal discipline, Brazil’s Finance Minister Fernando Haddad is starting to lose his balance.

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In recent weeks, Haddad has repeatedly run into the reality that his plan to shore up public accounts primarily through new revenues is likely unfeasible. While doubts about his ability to control fiscal deficits have roiled Brazilian assets, even more worrisome for the minister is that Luiz Inacio Lula da Silva’s confidence in his economic strategy now appears to be wavering as well.

That has plunged the finance chief who had become an unlikely darling of Brazilian investors into the worst moment of his tenure, as one person close to him described it this week. The situation may further deteriorate as Lula demonstrates that he has no interest in cutting spending, particularly as his approval ratings fall.

“The message that there will be no control in spending is becoming increasingly clear,” said Leonardo Monoli, chief investment officer at Azimut Brasil Wealth Management. “The finance minister seems increasingly isolated.”

Haddad suffered a major blow Tuesday, when Senate leader Rodrigo Pacheco swatted down a proposal to limit tax credits to cover the cost of an exemption from payroll levies.

The plan, announced last week while Haddad was in Italy, drew severe backlash from Congress and industries that rely heavily on such credits — especially in Brazil’s agribusiness sector.

Its demise increased the odds that Haddad will have to ease the government’s fiscal target for 2024, and highlighted that he is running low on ideas for how to avoid that outcome: The Finance Ministry, he told reporters Tuesday night, has no Plan B for covering the 26.3 billion-real ($4.9 billion) cost of the payroll exemption.

The Brazilian real has weakened nearly 10% this year, as deepening fears about the nation’s fiscal outlook turn it into one of the world’s worst-performing major currencies. Swap rates jumped more than 20 basis points across the curve after Lula spoke about the situation Wednesday, and the short-end of Brazil’s swap curve no longer prices in cuts to the central bank’s benchmark interest rate.

But stocks trimmed losses and the real strengthened 0.8% against the dollar Thursday after Haddad said that the government is reviewing its expenses and would analyze Senate proposals to compensate for the payroll exemption.

A ‘Weakening’ Minister

The defeat also suggested that Haddad is suddenly in a shakier position inside Lula’s government. Since taking office in the beginning of 2023, Haddad was able to convince his political mentor to support the creation of a new fiscal framework to limit spending, and later won a battle to maintain his ambitious budget target.

But now he is struggling to rack up victories on any front. As uncertainty swirled around the tax measure Tuesday, Lula held a meeting with businessman Ricardo Alban, the head of the National Confederation of Industries, one of the many entities angry over the proposal.

With Haddad pondering his next move, Alban left the presidential palace with Lula’s blessing to announce that the measure would be killed, according to a person with knowledge of the matter, who like others requested anonymity to discuss it publicly. Alban did so minutes later.

Jaques Wagner, the government’s leader in the Senate, then said in a speech that Lula hadn’t been “comfortable” with the plan, and that its rejection by the Senate chief had prevented an “endless tragedy.”

Spokespersons for Lula, Haddad and Alban did not immediately respond to requests for comment.

While investors have never quite fallen in love with Haddad, many have come to see him as the best option in a leftist government and are fearful of what comes next if he fails.

“The main point of concern is that Haddad is weakening,” said Priscila Araujo, a portfolio manager at O3 Capital. “He was basically the pillar of this government’s fiscal sustainability.”

No Plans to Leave

The pressure of pleasing both markets and Lula is clearly taking a toll on the minister, who last Friday told investors that he recognized the need for a structural review of government spending but was unsure if he could convince the president to make the changes needed to keep the fiscal framework intact.

But while Haddad is fatigued, he is committed to remaining in the post, people familiar with the situation said. Lula continues to have “deep trust” in the minister he has long viewed as the best-prepared of a new generation of leaders on the Brazilian left, allied lawmaker Randolfe Rodrigues said on the Senate floor Tuesday night.

Wagner dismissed the possibility of Haddad leaving the ministry, telling reporters Wednesday that lawmakers must find a way to offset the payroll exemption.

Haddad intends to keep pushing to balance the budget even if Lula resists the plan. The minister this week announced that he will soon present ideas to control spending as Brazil approaches the Aug. 31 deadline to deliver its 2025 budget bill to Congress.

“During the budget discussion, we will take some proposals to the president,” Haddad told reporters Tuesday. Lula, he added, “may or may not accept them.”

--With assistance from Daniel Carvalho and Leda Alvim.

(Updates with market reaction to Haddad comments in ninth paragraph)

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