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Government presents military pension reform

April 1, 2019

Proposal on military pension reform to save BRL 10 bn over the next ten years. Social Security’s constitutional amendment still at the CCJ.

The Brazilian economy in March 2019

Jair Bolsonaro’s team presented the proposal to reform the Armed Forces’ Social Protection System, along with a plan to restructure military careers. The Lower House's Constitution and Justice Committee chose the rapporteur of the pension reform. The slow recovery in the labor market continued in February, influenced by weak activity in early 2019. Inflation readings remain well behaved.

Government's proposal on military pension reform to save BRL 10 bn over the next ten years

The government presented to Congress a proposal to reform the Armed Forces Social Protection System, along with a plan to restructure military careers. If the proposal is approved, 97.3 billion reais in savings are estimated to materialize over 10 years with changes in pension rules, which contemplate extended years of service and higher contribution rates. At the same time, a plan to restructure military careers was also presented — one which would increase expenses by 86.85 billion reais over 10 years. Hence, estimated net savings over 10 years would be 10.45 billion reais. The next step will be the creation of a special committee to analyze the text. If approved, the proposal will move to a vote on the main floor of the Lower House (a simple majority is required, as long as a minimum of 257 representatives are present). The proposal would be sent to the Senate after approval by the Lower House.

As for the Social Security reform, the president of the Constitution and Justice Committee (CCJ) on the topic, Felipe Francischini (PSL-Paraná) announced that lawmaker Marcelo Freitas (PSL-Minas Gerais) will be the rapporteur of the reform in the commission. This is a key step, as the proposal can only move to a vote on the Lower House’s floor after the text is approved by the committees. According to Francischini, the CCJ may vote on the text on April 17. Right after that, the proposal will be analyzed by a special committee, which has yet to be formed.

Weak activity still influences employment figures

According to the Ministry of Labor’s CAGED registry, a net 173k formal jobs were created in February, beating market expectations (90k) and printing close to our estimate (150k). Notwithstanding the surprise, seasonally-adjusted figures point to 55k new jobs in net terms during the month, pushing the three-month moving average down to 41k from 50k in the previous month. Breaking down by sectors, services, retail and manufacturing opened new posts, while agriculture destroyed jobs in net terms in February. 

According to IBGE the nation-wide unemployment rate dropped to 12.4% in February from 12.6% one year earlier. After a few months of gradual increases, the seasonally-adjusted unemployment rate declined again (to 12.2% from 12.3% in January) but remains high by historical standards, caused particularly by the still-moderate recovery in economic activity. The real wage bill went up 2.0% yoy and 0.8% on a quarterly basis in February. Importantly, the real wage bill is strongly correlated with core retail sales (excluding vehicles and construction material). Going forward, we expect the unemployment rate to slide to 11.8% by year-end and to 11.5% by the end of 2020.

Confidence declines in March

Confidence indicators published by FGV posted widespread declines in March. Consumer confidence declined 5.3 pp during the month, as both components receded: current situation, by 1.9 pp, and expectations for the future, with a noteworthy 7.0 pp drop. In the same trend, confidence among retail entrepreneurs decreased for a third consecutive month, by 3.2 pp, influenced particularly by the component related to current conditions (-4.5 pp) and to a lesser extent by future expectations (-2.1 pp). Industrial confidence, which had shown the best relative performance early in the year, fell 1.8 pp in March and did not recover from the slide caused by tighter financial conditions in 3Q18, remaining below the level seen in the first half of last year. Confidence among construction and service businesses also receded in March, by 2.9 pp and 3.6 pp, respectively. Overall, these indicators are consistent with weak economic activity in early 2019.

Weak activity in early 2019

Economic activity indicators were mixed in January. Industrial production (-0.8%) and services revenues (-0.3%) declined, while core retail expanded 0.4% and beat market expectations, but not enough to offset the 2.1% drop of the previous month. In our view, the weaker pace early in the year — particularly in industrial output — results from lagged effects of tighter financial conditions in 3Q18, combined with the slowdown in global growth. Going in the same direction, the Central Bank's economic activity index IBC-Br dropped 0.4% mom/sa in January, worse than market expectation. The indicator rose 0.8% yoy (vs. 0.2% yoy in December).

Inflation dynamic is persistently benign

The mid-month IPCA-15 climbed 0.54% in March, printing above the median of market expectations (0.51%). The yoy change accelerated to 4.18% from 3.73%, but the move was largely driven by base effects, which will likely fade after two more months. Food (0.32 p.p.) and transportation (0.11 p.p.) provided the largest contributions to the March result. In February, the headline IPCA rose 0.43% and the year-over-year change picked up to 3.89% from 3.78% in January, remaining at comfortable levels. Going forward, our preliminary forecast for the IPCA in March is 0.59% with the year-over-year rate going up to 4.41%. For the full year, our estimate is 3.6%. 

BCB waits for clarity about reforms and the pace of economic recovery

The Copom decided to keep the Selic rate unchanged at 6.5% pa, as widely expected, in a unanimous vote. Despite the lingering uncertainties regarding the continuity of reforms, the committee now sees the balance of risks to inflation as symmetric, conceding that recent indicators point to a slower-than-expected pace of economic recovery, but that an assessment of that behavior will require time. The Copom meeting minutes attributed the sluggishness to the shocks seen in 2018 (in particular the truckers' stoppage and tighter financial conditions). The text notes that as of yet the GDP forecasts for 1Q19 or 2Q19 onward have not changed, which hints that, if/when these do, the Copom will reassess whether its stance is appropriately expansionary. Given the current weakness of activity data, this might indicate willingness to adjust the degree of stimulus in the not too distant future, perhaps even within the first half of 2019. However, the minutes also bring plenty of mentions on the needed fiscal reforms and the risks failure of this agenda would pose for the scenario.  

In sum, regardless of the state of the economy, the authorities seem to be unlikely to budge until we have much more clarity on the outlook for social security reform.  Importantly, the 1Q19 Inflation Report presented inflation forecasts that are consistent with stability in the Selic rate at the current 6.5% level throughout 2019, in the absence of shocks and/or disappointments with economic activity. Thus, for the time being, given all the uncertainty surrounding the central scenario, we expect the Selic to remain unchanged in coming meetings.

Primary deficit of 14.9 billion reais in February

The consolidated public sector posted a primary budget deficit of 14.9 billion reais in February. The central government had a deficit of 18.3 billion while regional governments and state-owned companies posted higher-than-anticipated surpluses of 4.8 billion and 0.8 billion, respectively. The consolidated primary deficit over 12 months receded to 1.5% of GDP in February from 1.6% in January. In our view, meeting the public sector’s annual primary deficit target of 132 billion reais will require discipline, but will not be so challenging. The general government’s gross debt increased marginally to 77.4% of GDP in February from 77.3% in January, while the public sector’s net debt remained at 54.4% of GDP. Importantly, a favorable fiscal scenario depends strictly on the approval of reforms, such as the pension reform, that signal a gradual return to primary surpluses that are compatible with structural stabilization of public debt.

Financial assets

In March, the Ibovespa receded 0.2%% in local currency and 4.2% in U.S. dollars. Country risk measured by the 5-year CDS increased 23 bps and finished the month at 180 bps. The exchange rate depreciated 4.2% to 3.90 reais per dollar by the end of the month.

Upcoming events

In Brazil, attention will continue to focus on the Social Security reform proceedings in the Lower House’s Constitutional and Justice Committee, and the then the creation of the special commission on the subject.

Overseas, the U.S. and China may be closer to a trade deal amid new rounds of talks. In Europe, the British government seeks alternatives in order to avoid Brexit without a deal.


 



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