In Latin America’s largest country, Brazil, the seizure of top government buildings in the capital by supporters of former President Jair Bolsonaro has become a major test for investors, Reuters writes.

A peaceful transfer of power has followed elections since the end of the country’s long-running military regime in 1985, but Brazil’s political polarization will be a problem for newly sworn-in President Luiz Inacio Lula da Silva following his recent victory in October elections.

This is likely to be a temporary shock though, and investment will bear fruit depending on the course of economic policy under Lula and global financial conditions, according to experts.

However, investors and analysts are by no means ignoring Lula’s risk-control objectives, and believe that the long-term focus will remain on fiscal issues, and his main challenge will be to unite a working coalition in Congress to pass legislation, while at the same time not undermining his popularity with unpopular fiscal measures, which could delay the timing of the announcement of fiscal adjustment measures.

Lower inflation in the country may allow the central bank to start cutting the policy rate in the second half of the year.

Discussing a new fiscal framework is a key move by the Lula administration after policymakers highlighted the inflation risk associated with the recently elected leftist president’s R$168 billion ($32 billion) spending proposal to fulfill his campaign promises.

Recent protests and violence over the weekend may reduce pressure on Lula to unveil an economic plan in the coming weeks and slow the reform program.

But the impact of the protests in the short term on the market looks limited. The real fell 1.6% but has recovered most of its losses, the stock market has started to rise again after an initial drop, while credit-default swaps are broadly stable.

The country’s commodity-exposed economy and constant regulation by the central bank made Brazil the choice of investors in emerging-market asset managers last year.

Violent demonstrations indicate deep social and political polarization before and after the elections, and the unsettled and divided political environment and associated high social tensions keep risk premiums high and could undermine overall manageability. Social tensions in the country could increase if Lula’s government loses popular support in the context of more severe economic difficulties.

Brazil’s hard currency debt spread over U.S. Treasuries rose to 262 basis points on Monday, moving further away from pre-pandemic levels.