Implementation of pension reform is a critical move for Brazil to stabilize its fiscal accounts and step out of its fragile economic status. It is one of the most important economic events in the country since the Real Plan in 1994.
The long-anticipated Pension Reform Bill was approved in the Brazilian Congress with 379 votes in favor (308 were needed) and 131 votes against. It is expected that total savings for the government will be BRL 960 million over ten years.
The Lower House will need to vote on the bill for a second round before Congress recess (this week or the next). Following the second vote, the bill then proceeds to the Senate, which has 45 days in which to deliberate and vote on the bill, in two rounds.
The first vote was the most important as it established the guidelines of the social security reform. Some requested amendments will be debated and voted on in the second round of votes in the Lower House, but the base text or amount of savings to be achieved are not expected to change materially.
A key point being discussed currently is how states and municipalities would be incorporated into pension reform. The base text did not establish that, and it is most likely that this issue will be addressed by the Senate. Incorporating states and municipalities would increase the savings achieved through the reform, since some states are in financial difficulty and require reforms to their public pension systems to re-balance their fiscal budget.
The Ministry of Finance is said to be preparing a growth-stimulus package to be released now that the reform bill has passed. Most likely there could be some measures to reduce bureaucracy and costs for entrepreneurs, the release of social security funds to be accessed by consumers, and some credit-stimulus measures.
The central bank has already guided for a new cycle of rate cuts, should the social security reform bill pass. The market expects rate cuts of 100-150 bps in coming months. We expect at least a 150 bps rate cut by the central bank given that inflation numbers in Brazil have been trending below target.
It is expected that discussions about other important reform measures will begin in August, after Congress recess. The most important will be tax reform: the business community has been demanding a reduction in the complexity of the Brazilian tax system for a long time. In addition, it is expected that there will be a vote on a new regulatory framework for the sanitation sector, which will be of key importance for the 2020 municipal elections.
Passing the Pension Reform Bill was a significant victory for the current administration and the number of votes in favor of the reform has shown that the government has the support required to pass other important projects. These are expected to include tax and administrative reforms, improvements in energy and infrastructure regulations, and the economic freedom and independence of the central bank bills.
We are overweight in Brazil for our EM Core strategy and have a weight of 10% in Brazil for EM Stars. We are overweight because of the unique political moment in Brazil with the new administration being aligned with the Congress in the implementation of important structural reforms and a vast privatization agenda. The current efforts of the government to adjust Brazil’s fiscal accounts and improve the country’s efficiency should pave the way for an increase in investments as a share of GDP and improve the country’s growth potential.