Lula’s unexpected reelection triggered a sharp selloff in Brazilian markets, leaving the president under pressure to present a spending-cut plan. According to Sina Finance, the real fell 8% against the U.S. dollar in one day, its worst performance since 1999, while the benchmark Bovespa index dropped 13.9%.

Schroders Latin American equities head and portfolio manager Pablo Riveroll said a credible fiscal plan would need to improve tax collection and cut spending. Brazil’s fiscal deficit stands at 9.5% of GDP, and fund managers and economists say high debt is one reason interest rates remain elevated. Brazil’s government debt is 83% of GDP, a high level for a developing country.

Investors had positioned for a pro-business camp led by Flavio Bolsonaro to take power, and the unwinding of those trades contributed to Monday’s selloff. Lula’s campaign pledges to increase welfare spending were the main trigger for market anxiety. The measures, including debt relief and higher welfare benefits, are estimated by the Brazilian Senate’s Independent Fiscal Institution to cost about 298 billion reais (approximately $55 billion) this year. Riveroll said the campaign’s social spending plans lacked clear funding sources and support for a fiscal surplus.

JPMorgan analysts said in a Monday report that spending restraint alone would not be enough, and that reforms were needed to address rising mandatory spending. They also noted obstacles to securing presidential approval. Social security and public-sector salaries account for nearly 90% of Brazil’s budget, leaving the government little room to adjust without legislative changes.

Lula led Brazil from 2003 to 2010. In his third term, he has raised taxes and increased spending to spur growth. Critics say his loose fiscal stance has compelled the central bank to maintain tight monetary policy, with the benchmark rate at 13.75%.

Flavio Bolsonaro had pledged spending cuts equivalent to about 2% of the economy. Local media reported that Lula’s team was considering spending controls to improve the debt outlook and restore investor confidence; the government did not respond to a request for comment. Janus Henderson emerging-market bond portfolio manager Thomas Haugaard said a sustained recovery in the real would require spending cuts and a credible path to stabilizing public debt. He said investors would look for credible appointments, political support, and a fiscally focused adjustment plan with quantified targets and congressional backing.

A potential finance minister named within the Workers’ Party is Rafael Fonteles, governor of Piauí. He told GloboNews on Monday that the president was committed to balancing public finances. Although Bolsonaro lost the election, right-wing forces made substantial gains in legislative elections earlier this month, raising hopes among investors that Congress could constrain government spending. Eurasia Group analyst Leonardo Mello Reis expects Lula to introduce a moderate fiscal adjustment, but said an initial spending-cut plan would not be enough to reassure markets.