Brazil markets slump on incoming government budget proposal, Lula's remarks

© Reuters. FILE PHOTO: FILE PHOTO: Brazilian Real and U.S. dollar notes are pictured at a currency exchange office in Rio de Janeiro, Brazil, in this September 10, 2015 photo illustration. REUTERS/Ricardo Moraes/File Photo/File Photo

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 reactions 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, while interest rate futures jumped and local stock index futures slipped roughly 2%.

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 proposed by the transition team.

"Growing signs of a deterioration in the current fiscal framework and a significant expansion in spending have been weighing heavily on domestic financial assets," they said, with local markets on a rollercoaster ride awaiting for more details about Lula's economic plans.

Speaking at the COP27 climate summit in Egypt on Thursday, |Lula shrugged off market reactions, 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.

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 yet been made.

($1 = 5.4935 reais)