Itaú BBA - Government introduces a new proposal for the pension reform

Brazil Review

< Back

Government introduces a new proposal for the pension reform

December 1, 2017

The goal of the Temer administration is to have the matter voted in the Lower House before year-end.

The Brazilian economy in November 2017

The rapporteur of the pension reform in the Lower House, Artur Maia, introduced a new proposal to revamp the social security system in Brazil. The goal of the Temer administration is to have the matter voted in the Lower House before year-end. Strong demand and revised historical series improve the GDP perspective in 2017.The latest activity data point to a rebound in industrial production, retail sales and formal job creation. The unemployment rate declined to 12.2% in October. 

Government introduces a new proposal for the pension reform

The rapporteur of the pension reform in the Lower House, Artur Maia, introduced a new proposal to revamp the social security system in Brazil. The new bill maintained the minimal age of retirement at 65 for men and 62 for women, the transition rule and the equalization of public and private sector employees. On the other hand, the new proposal excluded rules to access assistance benefits under the BPC program. As in the first version presented by Artur Maia, changes in retirement rules for rural workers were also left out of the latest version. If approved, the new proposal would have an impact of 1.2% of GDP in 2025 (60% of the impact calculated for the government’s original proposal). The goal of the Temer administration is to have the matter voted in the Lower House before year-end.

Activity indicators resume an upward trend 

Industrial production, retail sales and formal job creation are growing again. Retail sales rose 0.5% mom/sa in September, close to the median of expectations, suggesting that the upward trend was resumed after two slower months (marked by a potential reversal of the temporary boost provided by withdrawals from inactive accounts held under employment protection program FGTS).  We expect continuing growth in retail sales in the coming months, influenced by falling interest rates and lower household debt levels, as well as by the gradual improvement in the labor market. Industrial production increased 0.2% in September and, according to the Labor Ministry’s CAGED registry, 59,700 formal jobs were created in October – result that was way over expectations. 

Strong demand and revised historical series improve the GDP perspective in 2017

According to IBGE, the GDP expanded 0.1% qoq/sa in 3Q17 and 1.4% yoy. The report showed a solid advance in domestic demand, consistent with a gradual recovery in economic activity as underlying growth is becoming more widespread. Household spending climbed 1.2%, advancing even after the end of withdrawals from inactive accounts held under the FGTS employment protection program. Gross fixed capital formation rose 1.6% qoq/sa, after 15 quarters of declines. On the supply side, agricultural GDP fell 3.0% during the quarter, reversing some of the hike seen in 1Q17. Industrial and service components increased 0.8% and 0.6%, respectively. Additionally, according to IBGE, the 2015 GDP growth was revised upward to -3.5% (from -3.8%), 2016 GDP growth was revised to -3.5% (from -3.6%).

The latest reading means upside to our scenario for GDP growth in 2017 (currently at 0.8%). Going forward, improved economic fundamentals — particularly interest rates — should support the recovery. However, this rebound can only be robust if the reform agenda continues to advance.

Gains in informal jobs slowed down in October

According to the national household survey (PNAD Contínua - IBGE), Brazil’s nation-wide unemployment rate fell to 12.2% in the quarter ended in October from 12.4% in 3Q17. Using our seasonal adjustment, unemployment was stable at 12.5%. Informal jobs are still a big driver of the decline in unemployment on a quarterly basis. However, the advance in the category started to slow down at the margin. The real wage bill expanded 4.2% yoy and 0.8% vs. the quarter ended in July.

Inflation remains low

The mid-month consumer price index IPCA-15 climbed 0.32% in November, below expectations. Year-over-year inflation accelerated to 2.77% from 2.71% in October. In our view, the year-over-year change will remain on the rise in the coming months, but will stay at comfortable levels, as the economy still operates with substantial slack in the labor market and low industrial capacity utilization.

Primary budget surplus tops expectations in October

The consolidated public sector posted a primary surplus of 4.8 billion reais in October, performing better than expectations. The consolidated primary deficit accumulated over 12 months increased to 2.9% of GDP, from 2.4%, due to the elimination of an elevated base of extraordinary revenue that resulted from the repatriation of assets in October of last year. The central government’s result, as published by the National Treasury, was a surplus of 5.2 billion reais in October, with the surprise reflecting lower discretionary spending. Regional governments and state-owned enterprises reported a surplus of 0.4 billion reais and a deficit of 0.6 billion, while we expected a surplus of 0.6 billion and breaking even, respectively. With the positive surprise in revenues, both recurring and extraordinary, mandatory spending coming in below what was budgeted, and better results for regional governments and state-owned enterprises, the primary surplus for the year should be slightly better than the established target of 162 billion reais (-2.4% of GDP) for the consolidated public sector. At 121.1 billion reais, revenues topped expectations and showed strong real annual growth. In spite of the surplus for the month, fiscal readings remain in a structural trend of deterioration, reinforcing the extreme importance of reforms (particularly pension reform) to correct the nation’s fiscal imbalance.

Current account deficit stayed at $343 million in October

The current account had a deficit of $343 million in October, narrower than expectations. Again, the surprise lied in lower interest expenses, and in the equipment rental account as well. The strong trade surplus continues to contribute to good current account readings, but the service and income deficit widened as the year went by. The current account deficit is set to end the year at a low level thanks to the good performance of the trade balance. For the next years, we maintain our expectation of a gradual increase in the current account deficit, but not to the point of compromising Brazil’s external sustainability.

Financial assets

In November, the Ibovespa fell 3.0% in dollars and 3.5% in the local currency. Country risk measured by the five-year CDS remained relatively stable at 171 bps. The exchange rate appreciated to BRL 3.26 per dollar.

What’s next

All eyes remain on negotiations surrounding the pension reform vote in the main floor of the Lower House. Government seeks to get a vote on the matter before year-end. The Central Bank’s Monetary Policy Committee (Copom) meets next week for the last time in 2017. News on the 2018 elections will be followed closely.



< Back