Itaú BBA - Lower House Constitution and Justice Committee sanctions pension reform

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Lower House Constitution and Justice Committee sanctions pension reform

May 2, 2019

The next step is the discussion of the content in the Lower House’s Special Committee.

The Brazilian economy in April 2019

Lower House lawmakers approved the government’s proposal for the pension reform at the Constitution and Justice Committee. The sluggish pace of the labor market along with the recent correction in confidence indicators point to a cooldown in economic activity in early 2019. Inflation dynamics remain benign, notwithstanding some short-term pressure.

Pension reform moves on to the Special Committee 

The Lower House’s Constitution and Justice Committee (CCJ) approved the government’s proposal to reform the pension system (PEC 6/19), with 48 members voting in favor and 18 against the report. The next step is the discussion of the content in the Lower House’s Special Committee, formed by 49 representatives. Marcelo Ramos (PR-Amazonas) was chosen to chair the Committee, while Samuel Moreira (PSDB-São Paulo) will be the rapporteur of the pension reform in this stage, which establishes a maximum of 40 sessions for debate in the main floor of the House. The 10 first sessions will be dedicated to the presentation of amendments. 

Government presents package to reduce bureaucracy

The government published a package of provisional measures (MP 881), aimed at reducing bureaucracy and withdrawing some of the norms and burdens on entrepreneurs. The measures have immediate effect, but have to be approved by Congress within 120 days, else they may be reverted. 

We summarized below the main changes: (i) lift of the need of licenses and permits for starting low-risk activities; (ii) flexible operation schedule; (iii) prices of products and services to be freely set by the market, except in regulated sectors; (iv) jurisprudence with binding effect for administrative decisions; (v) good faith in civil, business, economic and urban laws; (vi) invalidation of outdated norms; (vii) bureaucratic immunity to innovation; (viii) contracts superseding law; (ix) deadlines and tacit approval; (x) and Digital Brazil (digital documents, even those scanned from physical documents, have legal validity).

Labor market points to weak activity 

According to the Ministry of Labor’s CAGED registry, a net 43k jobs were destroyed in March, missing market expectations by a wide margin (+80k). Seasonally-adjusted figures point to 8k fewer jobs, pushing down the quarterly moving average to 16k, from 31k in the previous month. According to census bureau IBGE, the unemployment rate receded to 12.7% in March, from 13.1% one year earlier. The result was lower than our call and the median of market expectations (12.8% and 12.9%, respectively). Using our seasonal adjustment, unemployment receded 0.2 pp to 12.0% in March vs. the quarter ended in February. Notwithstanding the decline during the quarter, unemployment remains at historically-high levels, given the still-moderate pace of economic recovery.

Confidence levels remain low in April

Confidence indicators published by FGV showed weak results in April. Consumer confidence extended March’s decline and fell 1.5 pp in April, driven by a 2.7 pp drop in the component addressing expectations for the future, while the current situation component rose 0.5 pp. Confidence in the industrial sector climbed 0.7 pp. in April, after receding 1.8 pp. in the previous month, but remains at a low level. Capacity utilization reached 74.5%, pointing to substantial slack in the economy. Retail and construction indicators remained stable during the month. Both showed declines in the expectations component, which were offset by an increase in the current situation components. Confidence in the service sector dropped for a third consecutive month, by 0.9 pp.

Activity indicators disappoint in February

Activity figures were mixed in February. On one hand, broad retail sales (PMC) and revenues from services (PMS) receded 0.8% and 0.4%, respectively. On the other hand, industrial production (PIM-PF) advanced 0.7%. Overall, these readings reinforce the perception that activity was weak in early 2019. In the same direction, the Central Bank’s economic activity indicator (IBC-Br) dropped 0.7% mom/sa in February, below the median of market expectations. The indicator rose 2.5% yoy (0.8% in January). 

Inflation is under pressure in the short term but poses no risks

The consumer price index IPCA climbed 0.75% in March, topping our estimate and the median of market projections (both at 0.63%). The year-over-year change accelerated to 4.58% from 3.89%. In the same direction, the mid-month IPCA-15 rose 0.72% and printed somewhat above our call (0.69%) and the median of market expectations (0.67%). The result was driven by higher prices for food consumed at home and transportation, particularly gasoline. However, core inflation measures continue to show comfortable behavior. With these results, the IPCA-15 has gone up 4.71% yoy. We maintain our assessment that inflation is still showing benign dynamics, even if under pressure by volatile items in the short run. The risk of demand-led inflationary pressure remains low. Furthermore, inflationary inertia remains well-behaved, inflation expectations are anchored and slack in the economy is still high. 

Primary deficit of 18.6 billion reais in March

The consolidated public sector posted a primary deficit of 18.6 billion reais in March, better than our forecast (-29.0 billion) and market consensus (-21.7 billion). Regional and state-owned enterprises posted surpluses of 1.5 billion and 0.2 billion reais, respectively. Over 12 months, the consolidated primary deficit fell from 1.5% to 1.4% of GDP between February and March. In our view, meeting the public sector’s annual primary deficit target of 132 billion reais requires discipline, but shouldn’t be a major challenge. The general government’s gross debt rose from 77.4% to 78.4% of GDP between February and March, while the public sector’s net debt fell at the margin from 54.4% to 54.2% of GDP in the same period. Importantly, a favorable fiscal scenario is strictly dependent on the approval of reforms, such as the pension reform, that signal a gradual return to primary surpluses that are compatible with the structural stabilization of public debt.

Current account deficit of $494 million in March

The current account had a deficit of $494 million in March, disappointing our estimate ($500 million surplus) and market expectations ($100 million deficit). Overall, the current account deficit remains at low levels. For the next years, we maintain our expectation of a gradual increase in the current account deficit, but not to the point of compromising the sustainability of Brazil’s external accounts. Additionally, direct investment in the country is still the main source of financing for the current account deficit.  

Financial assets

In April, the Ibovespa advanced 1.0% in local currency and receded 0.3% in U.S. dollars. Country risk measured by the 5-year CDS receded 7 bps and finished the month at 173 bps. The exchange rate depreciated 1.2% to 3.94 reais per dollar by the end of the month.

Upcoming events

In Brazil, the focus will remain on the progress of the pension reform in the Lower House’s Special Committee. In the economic agenda, the highlights are the decision of the Monetary Policy Committee (Copom) on May 8 and the publication of 1Q19 GDP on May 30.

Overseas, U.S.-China trade negotiations should continue. Meetings have been scheduled by representatives of the two countries, who signaled that a trade agreement is near.

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