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Reforms advance

May 2, 2017

The Social Security report was issued and included changes that diluted the reform’s.

The Brazilian economy in April 2017

The Social Security reform’s rapporteur issues his report. The Lower House approves the labor reform and the state debt renegotiation bill. The Copom accelerates the easing pace. Indicators suggest GDP growth in 1Q17, but unemployment remains high. Inflation continues to decline, and expectations fall below the target. The trial of the Dilma-Temer slate at the TSE is postponed indefinitely.

Social Security reform’s rapporteur issues his report

The Social Security reform’s rapporteur, Arthur Maia (PPS-BA), issued his report in the Lower House Special Committee and included changes that diluted the reform’s content with respect to the original document submitted by the government. Among the main changes are the reduction of the minimum retirement age for women to age 62 from 65 (remaining at age 65 for men), and the transition rule. The new transition rule suggested by the rapporteur foresees a combination of a 30% “toll” (adjustment factor) on the remaining contribution period for retirement under the current rules, with an immediate minimum age of 53 for women and 55 for men, which will gradually increase to 65 for men and 62 for women. According to our calculations, the changes dilute by about a third of the total savings that would be created if the proposal were approved in full. The proposal will probably be voted in the Lower House Special Committee in the first or second week of May, and then submitted to a plenary vote in the Lower House.

Lower House approves labor reform and state debt bill

The labor reform was approved in the Lower House with 296 votes in favor and 177 votes against, and is now headed to the Senate. The reform changes the labor legislation, aiming to make the job market more flexible. Among the main points are allowing negotiations between employers and employees to prevail over what is written in law, limiting the power of courts in interpreting the law, and the end of the compulsory contribution to labor unions. The Lower House also approved the states' debt renegotiation bill with 301 votes in favor and 127 against,. The measure suspends debt payments of states under financial distress (states that declared “fiscal calamity”) to the Union for a period of three years, in exchange for austerity measures, such as structural adjustments in the states’ fiscal accounts.

Copom accelerates the easing pace

The Central Bank’s Monetary Policy Committee (Copom) cut the Selic rate by 100 bps to 11.25%, in line with expectations. The minutes of the April meeting reveal that the committee considered a more aggressive move than the 100-bp cut, but ended up opting for a "moderate" acceleration, due to the forward looking nature of policymaking and uncertainty around the scenario. The Copom again highlights that the pace of monetary easing will depend on the extension of the intended cycle and the degree of front-loading, which in turn will also depend on the behavior of economic activity, other risk factors mentioned by the committee, and inflation forecasts and expectations. Although the authority considers that the current pace is adequate, the Copom expresses that the current economic scenario requires monitoring the determinants of the degree of front-loading.

Indicators suggest GDP growth in 1Q17

We increased our 1Q17 GDP forecast to 1.4% from 0.5%. Our scenario is based on a strong contribution from agricultural production, a favorable statistical carryover from industrial production and stabilization of services. As the increase is influenced by specific factors which are concentrated in 1Q17, for now we maintain our forecast of 1.0% GDP growth in 2017. The pace and consistency of the recovery depend on the progress of the reforms.

Unemployment remains high

According to the Ministry of Labor, 63.6K net formal jobs were closed in March, worse than expectations. In seasonally adjusted terms, 74K net job posts were lost. Data on formal job creation has been improving in recent months, but net creation remains in negative territory, suggesting that unemployment will probably continue to rise ahead. The national unemployment rate followed this trend, reaching 13.7% in March. Using our seasonal adjustment, unemployment rose to 13.2% from 13.1%.

Inflation continues to decline, expectations fall below the target

Inflation measured by the IPCA-15 reached 0.21% in April, below expectations. Year-over-year, inflation fell to 4.4% from 4.7% in March. April’s numbers are in line with the downward trend in inflation observed in recent months, and continue to reflect the widespread slowdown among its components. According to the BCB's Focus Report, inflation expectations for 2017, 2018 and 2019 stand below the BCB's target of 4.5%, suggesting that the market is already taking into account the possibility of a reduction in the inflation target, to be defined by the National Monetary Council in June.

Public accounts deficit remains high

The consolidated public sector posted a primary deficit of BRL 11 billion in March. The rolling 12-month primary deficit remains stable at high levels (2.3% of GDP), as does the nominal deficit (10% of GDP). As a result, gross public debt advanced 1 p.p. to 71.6% of GDP. Data continues to reinforce the need for reforms aimed at curbing the upward trend in public spending, especially the Social Security reform.

First quarter current account deficit is the lowest since 2007

The current account posted a USD 1.4 billion surplus in March, above expectations. Over 12 months, the deficit receded to USD 20.6 billion or 1.1% of GDP. Despite the increase in the services and income deficit, the record-high trade surplus in the first quarter contributed to maintain the current account deficit at a low level. The deficit remains largely financed by direct investment in the country, which in 12 months amounts to USD 86 billion.

The BRL depreciated, country risk diminished and the stock market climbed

Over the month of April, the Ibovespa fell 0.3% in USD and climbed 0.6% in reais, country risk measured by the five-year CDS diminished 9 bps, endeding the month at 218 bps. The exchange rate depreciated to 3.20 from 3.17 reais per dollar.

Trial of Dilma-Temer ticket is postponed

The Brazilian Superior Electoral Court (TSE) accepted a plea from the defense of former President Dilma Rousseff and decided to grant another five days to the presentation of the defense's final allegations. The stage of evidence collection was reopened and the trial was postponed indefinitely.

Upcoming events

Throughout May, reforms in Congress will continue to grab all attention, particularly the vote on the Social Security reform in the Lower House. Further developments on the labor reform and the states' Fiscal Recovery Regime will also be important.



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