Temer gives up on pension reform
After months of trying to push it through congress, President Michel Temer's administration has acknowledged the impossibility of approving its pension reform proposal, which sets a retirement age and is considered crucial to rein in Brazil's long-term spending and debt.
An unprecedented presidential decree ordering the army to intervene over the police force in Rio de Janeiro state in order to combat a wave of crime and violence was the nail in the coffin for the unpopular reform, which requires a constitutional change and did not have sufficient support in congress. Changes to the constitution are not allowed while a federal intervention such as the one in Rio is in force.
"The intervention in Rio just confirmed the most likely scenario, expected by investors, which is the end of pension reform efforts, as the government was not able to arrange enough support from lawmakers," Luis Otavio de Souza Leal, chief economist of Banco ABC Brasil, told BNamericas.
According to Leal, investors had already priced in the pension reform failure, and hence the impact on the Brazilian stock markets and currency is expected to be limited.
NEW MEASURES ANNOUNCED
To compensate for the failure of the reform push, and to calm markets concerned about the country's fiscal health, the Temer administration announced a list of 15 measures, including tax simplifications and a project to provide the central bank with autonomy, ensuring a fixed mandate for the governor and directors of the monetary authority.
These measures must also be approved by the congress, but are expected to face much less resistance from lawmakers. "Those measures are not new, they were under review for a long time, but it's just a way to show that the government is not paralyzed," said Leal.
A CRUCIAL ELECTION
Temer came into power in 2016 promising a wave of reforms, after taking over for ousted center-left president Dilma Rousseff. With the approaching of October general election, however, lawmakers opted to avoid unpopular measures such as the pension reform, an issue which will now be left for the future administration.
"Starting in April, when the political campaign starts to gain ground, we will have a better view of who the leading candidates are. Investors will pay more attention to their speeches, ideas," said Leal. "If an anti-reform candidate surges as a favorite, investors will be very nervous and this will start to hurt Brazilian asset prices more drastically."
RATINGS DOWNGRADES
In January, Standard & Poor's downgraded Brazil's sovereign rating to 'BB-' from 'BB' – putting Latin America's largest economy three notches below investment grade status. The decision was driven by the government's difficulties in implementing fiscal reforms and uncertainty around the October elections.
Brazil reached investment grade in 2008, as the country's economy was booming, but lost it in 2015 after consecutive years of ballooning debt.
Now, with the pension reform on indefinite hold, Fitch Ratings and Moody'sare expected to cut their own Brazilian sovereign ratings in the coming months.
"The failure to put the social security reform to a vote reflects the challenges of implementing corrective policies in a complicated political environment and against the backdrop of an impending election cycle," said Fitch senior director and head of LatAm sovereigns, Shelly Shetty.
"Downward pressure on the sovereign rating of Brazil ('BB'/Negative Outlook) continues reflecting large fiscal deficits, high and increasing debt burden and the failure to pass the social security reform that could have contributed towards reducing structural pressures on spending."
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