By Brendan O'Boyle
BRASÍLIA, Oct 26 (Reuters) - Brazil's octogenarian President Luiz Inacio Lula da Silva faces an uphill battle from day one of his final term, analysts say, with his plans hemmed in by economic headwinds and a right-wing Congress.
Already the country's oldest president, Lula overcame a first-round loss to pull off a surprise runoff victory against Senator Flavio Bolsonaro on Sunday, securing 51.8% of votes and a record fourth term just two days before his 81st birthday.
He will take office on January 5 after winning what he has said was his last election, hanging on to power in a country that has swung dramatically to the right since his first electoral victory in 2002.
FISCAL POLICY 'HIS BIGGEST CHALLENGE'
"Lula has shown that he still is the dominant political figure of his era, but he is weaker," Michael Ahn Paarlberg of the Center for International Policy think tank said.
Brazil's incoming Congress is its most conservative since the country's return to democracy in the 1980s, with Bolsonaro's party and its allies enjoying majorities in both chambers.
"He's likely to be a lame duck from the start," said Oliver Stuenkel, an international relations professor at Sao Paulo's Getulio Vargas Foundation, who predicted Lula would struggle to build a coalition to pass much of his agenda.
As of Monday morning, Bolsonaro, the son of former President Jair Bolsonaro, had yet to concede, and Lula faced the prospect of adversaries in Congress who do not recognize his win, analysts said.
In addition, Congress has amassed significant power over government spending in the past decade, which could frustrate Lula's promises to maintain his signature welfare programs.
Meanwhile, his government forecasts meager 2.3% economic growth next year, adding to fiscal challenges worsened by high interest rates and public debt that has grown past 82% of GDP, the highest since the pandemic.
"On the broad macroeconomic outlook, things are not looking great," Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, said.
A hostile Congress "will make it very hard to push any reform through Congress and even try to manage the budget," she said.
Lula's promises to ensure minimum wage increases remain above inflation are among those that clash with growing pressure to get debt under control. Lula’s aides have also signaled he will keep pushing to curtail tax breaks, but lawmakers have repeatedly resisted measures that raise the effective tax burden.
"Fiscal policy remains Lula's biggest economic challenge," said Andres Abadia, chief Latin American economist at Pantheon Macroeconomics, as growing mandatory spending and high interest costs leave little room to cut deficits.
Analysts said an economic crisis could even spur Lula's impeachment, with some drawing comparisons to Brazil's 2014-2016 crisis, which preceded the impeachment of Lula's ally Dilma Rousseff.
"I think the campaign for Lula's impeachment begins now," said Paulo Kramer, a political scientist who worked on former President Bolsonaro's first campaign and has spoken to people close to his son.
Investors reacted nervously on Monday morning, sending Brazilian assets sharply lower as markets reassessed the country's fiscal outlook under Lula.
SENATE STUMBLING BLOCK
Congress is likely to block or slow Lula's appointments to key roles in institutions such as the Supreme Court and the central bank, analysts say.
For the first time since Brazil returned to democracy, the executive branch will be clearly at odds with the Senate, Lucas de Aragao, a partner at Brasilia-based consultancy Arko Advice, said.
"Lula will have some room to negotiate in the lower house by giving centrist parties more space, but in the Senate he will have to bargain issue by issue and adjust his legislative agenda to fit what the opposition wants," Aragao added.
Bolsonaro's allies in the incoming Senate have also vowed to impeach Justice Alexandre de Moraes, escalating their long-running fight with a powerful judiciary that has often aligned with Lula, blocking key right-wing legislation and shaping policy on everything from Indigenous rights to the internet.
(Reporting by Brendan O'Boyle;Editing by Brad Haynes and Andrew Heavens)
