Flash Report /

Brazil's pension reform close to finally being voted into law

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    23 October 2019
    Published by

    After a slight disruption to the pension reform process in the Brazilian Senate, the chamber's president, Senator Davi Alcolumbre, told reporters last night that, if an amendment to the pension reform bill presented yesterday by the opposition Workers' Party (WP) passes the Senate floor today, the final draft will not need to go back to the House for further approval and will finally become law. If the amendments do not pass, the Bill will need to go back to the House to undergo an additional approval process. 

    An outside risk, as Bloomberg reported (based on an article in local newspaper Folha de Sao Paulo), is that the WP plans to appeal to the Supreme Court to block the bill's approval, alleging that "there were problems with procedures that the Senate's President adopted during the vote when some points of the Bill were approved in the second round of voting but not in the first round".

    Despite the WP’s claims, we expect the bill to be voted into law, either today (with the amendments, which somewhat water down the impact of the bill and lower the expected savings) or within a few weeks, if the bill has to return to the House. There seems to be consensus that the amendments are not substantive and that the Senate will approve them swiftly.

    The reduction in savings that the two amendments imply would amount to cBRL76.5bn, out of total expected savings of BRL800bn over a decade, as a result of provisions to include the military, states and municipalities, and eliminating the provision to establish individual savings accounts.

    Minister of Finance Paulo Guedes has stated that the next legislative step will be to pass a comprehensive fiscal reform, which, in combination with the pension bill, could substantially improve the country's finances on both the revenue (via the tax reform) and expenses (via the pension bill) sides.

    One of the main benefits from the pension and tax bills would be a reduction in the country's public debt, which currently hovers at c80% of GDP. The government currently has very little flexibility on spending since c90% of public expenditure is related to items mandated in the constitution; that is, only c10% is discretionary.

    We believe the pension reform bill, when made into law, will result in a relief rally for sovereign bonds that is likely to be mirrored by an overall tightening of corporates spreads. In addition, we expect the Brazilian Central Bank to continue to lower interest rates in its continued efforts to try to promote economic growth beyond the current levels of c1%.

    If all of these factors converge in a relatively short time, we believe there could be a sovereign ratings upgrade some time next year. This, coupled with what is already a strong FDI trend, would confirm Brazil as one of the most stable Latin American markets in which to invest.