By Lisandra Paraguassu and Marcela Ayres

BRASILIA (Reuters) -Brazil’s leftist President-elect Luiz Inacio Lula da Silva on Friday picked a trusted ally, former Sao Paulo Mayor Fernando Haddad, as his finance minister, ending days of speculation over a key appointment.

Lula is set to take office on Jan. 1 after narrowly defeating far-right incumbent Jair Bolsonaro in October.

Lula also chose career diplomat Mauro Vieira as foreign minister, former Congressman Jose Mucio as defense minister, Bahia Governor Rui Costa as chief of staff and the former governor of Maranhao state Flavio Dino as justice minister.

Investors had anxiously awaited Lula’s pick to run the economy, unsettled by his announcement of a multi-billion-dollar proposal to increase social spending from next year, a scheme that the lower parliamentary house has yet to vote on.

“Markets fear that Haddad’s administration could be marked by an expansion of public spending and an increase in the national debt,” said Leonel Mattos, analyst at Stonex Market Intelligence.

After the nomination of Haddad, a stalwart of Lula’s Workers Party (PT), Brazil’s real fell as much as 1.3% against the dollar before paring losses.

Although Haddad is seen as a moderate within the PT, investors worry about the risk of his ministry overseeing unchecked social spending and a lack of fiscal discipline, since Lula has given priority to meeting social needs.

Haddad dismissed the reports of market fears as “fake news” and pointed to his record as Sao Paulo mayor, when the city bonds gained an investment grade rating.

As the mayor of Brazil’s largest city from 2013 to 2016, Haddad renegotiated its debt with the federal government, reducing it by about 50 billion reais.

Since losing his re-election bid as mayor in 2016, Haddad has described himself as a college professor on Twitter.

A lawyer with a master’s degree in economics and a doctorate in philosophy, his name had been doing rounds for weeks as future finance minister.

Haddad’s relationship with Lula grew closer during the 2018 presidential campaign, when he was the PT candidate after Lula was barred from the race by graft convictions that were later overturned.

He has acknowledged the dangers of debt, but has argued that public spending can have a multiplier effect on economic growth while distributing income through society.

Haddad has also defended changes to taxes on income and wealth and the adoption of a value-added tax on consumption.

Lula said he would choose a planning minister “very in tune” with Haddad, but would decide the total number of ministries his government will have only after certification of his victory by electoral authorities on Monday.

Future Justice Minister Dino announced that Andrei Rodrigues would be named chief of the Federal Police. Rodrigues was previously running Lula’s security during a tense campaign marred by high-profile incidents of gun violence.

(Reporting by Lisandra Paraguassu and Marcela Ayres; Writing by Anthony Boadle; Editing by Arun Koyyur and John Stonestreet)

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