(Bloomberg) -- Inside Brazil’s presidential palace, angst is mounting as the economy sputters along, churning out tepid growth figures month after month. President Luiz Inacio Lula da Silva is ratcheting up the pressure on his top aides to boost spending, gin up faster growth and turn around his sinking approval ratings.

This, people close to him say, helps explain the decision this month to order state-run oil company Petroleo Brasileiro SA to withhold a $9 billion dividend to investors. And it explains the push to oust the head of mining giant Vale SA. The government can have Petrobras pump that $9 billion into priority energy projects instead, the thinking goes, and it can slide in a new leader at Vale who’s more focused on creating jobs and less on shareholder returns.

The moves have shocked investors. In 2023, Lula’s first year in office since he left power a decade earlier, they had gotten used to a measured, even cautious president who resisted temptations to swell the budget.

So when word on the Petrobras dividend got out, they pushed the stock down 11% in a matter of hours. The bigger question being asked on Sao Paulo trading desks now is whether these moves augur a new, riskier policy approach or whether Finance Minister Fernando Haddad will manage to convince Lula to stick to the more cautious stance that stoked rallies in Brazilian stocks, bonds and currencies in 2023. 

Lula called a cabinet meeting for Monday morning to demand from all his ministers more proposals and concrete projects to boost growth.

“All we’ve done so far is just the beginning and not enough,” he said at the opening of the meeting. “We’ll have to do much more.”

Read More: Lula Pulls Off Rare Trick Twice, Wooing Wall Street and the Poor

Lula first took office in 2003, when Brazil was benefiting from a commodities supercycle that delivered roaring growth, balanced budgets and brought millions out of poverty. That helped his popularity to soar at home and abroad. 

Fast forward to 2024, and the now 78-year-old president is in a tighter spot. A bumper harvest in 2023 has depressed prices for agricultural exports, so many farmers risk losing their land to creditors. High borrowing costs have strained the manufacturing sector and the polls show his approval rating slipping. Growth is set to slow this year.

Investors are left to wonder whether this will force out even more of Lula’s interventionist instincts, pushing the leader to exert greater pressure on other state-linked companies, the central bank and the finance ministry. 

“The political risk was reignited in recent weeks by Petrobras and Vale,” said Priscila Araujo, a portfolio manager at O3 Capital. “We were in a more favorable scenario, and it has gotten more cloudy. We don’t know yet if it will turn into a big storm.”

The Markets React

The reaction in financial markets to Lula’s more hands-on approach has, at least so far, been negative. 

Assets tied to Petrobras and Vale slumped after the government’s interference, but so did the broader Brazilian market. The real weakened, long-end swap rates climbed and the Ibovespa equity index fell to the lowest in more than three weeks.

The real has slipped against the dollar so far this month, and the stock benchmark is fresh off a second-straight week of declines. 

“Global stock markets are hitting consecutive all-time highs, while Brazil continues to slide,” said Araujo. “This type of noise does not favor the market mood.”

Read More: Petrobras Dividend Disappointment Sends Stock, Currency Tumbling

The sour mood has been hard to shake, especially as a Vale board member resigned in protest of the government’s growing influence. Lula has also spurred questions at Braskem SA, Latin Americas’ biggest petrochemicals producer, by pushing to place long-time ally Guido Mantega on the board. The company said that it’s not aware of the government’s intention to appoint Mantega to the board.

Investor concern is expanding toward the central bank, too, as Roberto Campos Neto’s term ends later this year. The former trader has been a darling of the market, taming inflation with an early and aggressive hiking cycle that took interest rates to a six-year high — much to Lula’s chagrin. 

While the president’s appointments to the board of the monetary authority have been well digested by investors, questions remain about a more politically loyal replacement at the helm of the institution.

“What could make us change our investment thesis is the discussion around the central bank,” said Daniela Da Costa-Bulthuis, a Rotterdam-based portfolio manager at Robeco Institutional Asset Management. “It’s much more relevant for the international investor than what is happening with Petrobras.” 

Regardless of who Lula appoints, the next central bank president stands to inherit a challenge in containing inflation amid pressure to further lowering interest rates. It’ll be doubly hard if Haddad loses sight of fiscal discipline and squanders the hard-won confidence he has built with the financial community. 

While Haddad has so far fixed the deficit and raised revenue, his challenge now is to convince Lula that extra cash needs to help balance the budget — not funneled into inflationary public spending. 

The president has said recently that the government would discuss current spending caps with lawmakers to see “how we can use more money to benefit the people.”

The potential for fiscal deterioration is already trickling into markets. Investors forecast a primary deficit of 0.8% in 2024, according to a weekly central bank survey. And Haddad is clearly under pressure to free up cash, even canceling a recent trip to Germany to discuss emergency economic measures with the cabinet.

“Anyone who has been around Brazil for a while is well aware of the risk of Lula intervening,” said Greg Lesko, a portfolio manager at Deltec Asset Management in New York. “The question will be how much is bark and how much is bite.”

--With assistance from Giovanna Bellotti Azevedo and Martha Beck.

©2024 Bloomberg L.P.