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Government presents pension reform to Congress

March 1, 2019

The new pension reform proposal implies savings of 2.7% of GDP by 2027 (or BRL 1.1 trillion accumulated over 10 years).

The Brazilian economy in February 2019

Government presents to the National Congress the proposal to overhaul the pension system. Roberto Campos Neto takes over as Central Bank governor after his confirmation in the Senate hearing. GDP growth, at 0.1% qoq/sa and 1.1% yoy in 4Q18, confirms the weak pace of economic activity. The labor market put on a timid performance in January, with the unemployment rate remaining stable at 12.3% (seasonally adjusted) and formal job creation coming well below expectations. Inflation numbers remain well behaved.

Pension reform proposal has an impact of 1.1 trillion reais over 10 years

The government presented to the National Congress the proposal to overhaul the pension system. The next step is to send the content for constitutionality analysis by the Lower House's Constitution and Justice Committee (CCJ). If approved by the CCJ, special committees will be formed to discuss other aspects of the proposal and then it will move on to the main floor, where it requires support from at least 308 of 513 representatives, in two voting rounds. After approval by the Lower House, the text will proceed to the Senate.

The proposal sent implies 2.7% of GDP in savings by 2027 (or 1.1 trillion reais over 10 years), 30% more than the original version of the constitutional amendment proposal (PEC 287/16 - 2.1% of GDP; 850 billion reais) and 90% more than its modified version (1.4% of GDP; 575 billion reais). The amount saved is lower in the earlier years but increases over time. Compared to PEC 287/16, the main changes include a shorter transition rule, a longer minimum period of contribution of 20 years vs. 15 years, rules for rural pensions, the establishment of a phased system for the continuous cash benefit program (BPC) and special social pensions (LOAS) and the establishment of progressive rates of pension contribution according to income.

Roberto Campos Neto takes over as new Central Bank governor

The Senate's Economic Affairs Committee approved the appointment of Roberto Campos Neto as Central Bank governor and Bruno Fernandes and João Pinho de Mello to the Board of Directors. Campos Neto's confirmation was signed in the presidential palace last Thursday (Feb. 28). Addressing the Senate, he conveyed a message of continuing the work of his predecessor, praising the quality of the work delivered by the outgoing team regarding microeconomic reforms, as well as the caution, serenity and perseverance shown by them when guiding monetary policy.

GDP confirms weak growth in late 2018

GDP expanded 0.1% qoq/sa in 4Q18, in line with expectations. Year-over-year, the indicator climbed 1.1%, disappointing market expectations but printing close to our estimate. The reading reinforced the perception of weak growth in late 2018. GDP growth in 2018 was the same as in 2017, at 1.1%. The recovery that began in 2017 remains timid when considering the declines in GDP in 2015 (-3.5%) and 2016 (-3.3%). Going forward, we expect GDP to grow 2.0% in 2019 and 2.7% in 2020, assuming progress in reforms.  Importantly, the earliest indicators for 1Q19 add a downward bias to our call.

Ponting in the same direction, core retail sales in December fell 2.2%, disappointing the median of market estimates. The reversal of the Black Friday effect was sharper than anticipated, with outstanding declines for “other personal and household items" (-13.1%), “furniture and appliances” (-5.1%), and "apparel" (-3.7%). Broad retail sales (including vehicles and construction material) dropped 1.7%, pressured by declines in auto sales and shipments of construction supplies. Also in December, real revenues from services rose 0.2% mom/sa, according to census bureau IBGE, but dropped 0.2% yoy after a 0.9% hike in the previous month.

Confidence among retailers recedes in February

Confidence indicators published by FGV were mixed in February. Confidence among retailers decreased significantly by 3.7%, influenced particularly by the expectations component, which plummeted 5.4% during the month. Industrial confidence continued to increase, but at a slower pace (0.8%) and not enough to recover from the decline prompted by tightening financial conditions in 3Q18. The indicator is still below the level seen in the first half of 2018. Confidence among construction businesses receded 0.5%, as the 0.9% slide in the component related to current conditions was somewhat offset by a timid 0.1% uptick in the expectations component. Confidence among service providers experienced a deterioration in expectations (-4.2%) that led to an overall drop of 1.7% in February.

Labor market remains sluggish in January

According to the Ministry of Labor’s CAGED registry, a net 34.3k formal jobs were created in January, well below the median of market expectations (86k). Seasonally adjusted figures point to 26k new jobs in net terms, pushing down the three-month moving average to 50k from 58k in the previous month. Breaking down by sectors, services, retail and manufacturing showed job gains while construction eliminated posts in net terms during the month. According to the national household survey (PNAD Contínua), Brazil’s nation-wide unemployment rate stood at 12% in December, printing in line with our estimate and somewhat higher than the median of market expectations (11.9%). Compared to the same quarter one year earlier, unemployment declined just 0.1 p.p. Using our seasonal adjustment, unemployment was stable vs. the previous reading, at 12.3%, reflecting weakness in the labor market in early 2019.

Inflation is slightly below estimates

The latest inflation reports continue to point to a slowdown in price increases, with results that are lower than the median of market expectations. The IPCA climbed 0.32% in January, printing below the median of market estimates (0.37%). The index had risen 0.15% in the previous month and 0.29% in January 2018. The year-over-year change accelerated somewhat to 3.78% from 3.75% in 2018. The mid-month index IPCA-15 rose 0.34% in February, also somewhat below the median of market expectations (0.36%). The year-over-year change decelerated to 3.73% from 3.77% in January. Market-set prices went up 0.43% in February and the year-over-year change remained at 3.0%. Regulated prices moved 0.09% in February and their year-over-year change decelerated to 5.8% from 6.1% in January. In the absence of exogenous shocks, inflation should remain well behaved throughout the year, relying on favorable inflationary inertia, inflation expectations that are anchored at their targets, spare capacity in the economy and a relatively stable exchange rate. 

Copom keeps the Selic rate at 6.50% pa

The Central Bank's Monetary Policy Committee (Copom) unanimously decided to leave the base rate unchanged at 6.5% pa, as expected. The minutes of the meeting show that the committee has apparently discussed more extensively the economic activity outlook, and concluded that, when taking into account the shocks that took place in 2018, recent developments are consistent with its base case scenario, of a gradual economic recovery. The committee also emphasized that the pace of economic recovery will depend crucially on a reduction of uncertainties regarding reforms, especially those of fiscal nature. Risks are still perceived as being asymmetric to the inflationary side, but have abated, especially due to the external outlook, which now contemplates a possible intensification of the global slowdown. The text also stressed the need for a cautious approach to monetary policy. In sum, the minutes reinforce the case for stable Selic rate at 6.5% in coming meetings, barring any significant shocks, as well as the impact that reforms may have on monetary policy decisions down the road. 

Seasonal primary surplus in January 

The consolidated public sector posted a primary budget surplus of 46.9 billion reais in January, printing slightly below our call (48.8 billion) but higher than market consensus (41.1 billion). The central government had a surplus of 30.2 billion reais, missing a bit our 31.8 billion estimate, while regional governments and state-owned companies posted surpluses of 10.8 billion reais and 0.5 billion reais, respectively, that came in line with expectations. The consolidated primary deficit over 12 months remained at 1.6% of GDP, the same as in December. The January report stresses that meeting the annual primary deficit target of 132 billion reais requires discipline but shouldn’t be so challenging. The general government’s gross debt was stable vs. December, at 76.7% of GDP in January, while the public sector’s net debt increased to 54.0% of GDP from 53.8%. The nominal deficit narrowed to 6.8% of GDP from 6.9%, reflecting lower interest expenses. 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 in public debt.

Financial assets

In February, the Ibovespa declined 1.9% in local currency and 4.1% in U.S. dollars. Country risk measured by the CDS fell 10bps and finished the month at 156bps. The exchange rate depreciated 2.4% to 3.74 reais per dollar by the end of the month.

Upcoming events

Discussions around the pension reform will remain under the spotlight in Brazil, especially the schedule for constitutionality analysis by the Lower House's Constitution and Justice Committee (CCJ). Furthermore, the government may send a pension overhaul proposal to the Armed Forces. On March 19-20, the Copom will hold its first meeting chaired by Roberto Campos Neto.

Overseas, the U.S. and China may be closer to a trade deal that could be announced after a meeting by Presidents Donald Trump and Xi Jinping in late March. Still on China, the National People's Congress (NPC) will meet to lay out the country’s policy priorities for the coming year, as well as set targets for economic growth. In the U.K., additional votes on Brexit on March 12-14 may decide a postponement of the departure from the European Union, which, as of now, is scheduled for March 29. 



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