Itaú BBA - Pension reform report presented at the Lower House in Brazil

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Pension reform report presented at the Lower House in Brazil

June 14, 2019

Considering the report, we estimate fiscal savings of BRL 930 bln in 10 years

Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.

Talk of the Day


The pension reform’s (PEC 06/19) rapporteur, Samuel Moreira (PSDB/SP), presented his report to the Special Committee in the Lower House. Considering the report, we estimate fiscal savings of BRL 930 bln in 10 years, or a 1.9% of GDP increase in primary result in 2027. The proposal now moves on to a vote by the Special Committee, with the following step being a two-round voting by the Lower House floor. If approved without any further dilution, primary result would reach a 0.8% of GDP deficit in 2027, all else kept constant, which highlights that reforming the pension system is a necessary but not sufficient condition to rebalance fiscal accounts and stabilize public debt.

Real service sector revenue increased 0.3% mom/sa in April, after 3 consecutive declines. Compared to the same period of 2018, the indicator declined 0.8%, slightly below market expectations (-0.6%) and our forecast (-0.5%). The breakdown shows growth in 3 categories and declines in 2 groups. Services offered to families, which has a low weight on PMS but is important for our GDP tracking, increased 0.1% mom/sa. Transportation services, on the other hand, declined 0.6% after a positive reading in the previous month. Data already released for April and May indicate slow growth in the second quarter – our preliminary GDP forecast for 2Q19 stands at +0.3% qoq/sa, after a 0.2% decline in 1Q19. 

April’s Itaú Unibanco monthly GDP (PM-Itaú) advanced 1.0% mom/sa and 0.4% yoy. Mixed economic activity figures were behind this performance. On one hand, industrial production (PIM-PF) and real revenues from services (PMS) both went up 0.3% during the month. On the other hand, broad retail sales (PMC) remained virtually flat. From a demand standpoint, household spending increased 0.2% during the month, while capital investment expanded 2.1% mom/sa. For May, we expect, for the time being, PM-Itaú to remain stable. ** Full story here.

Day Ahead: At 8:30 AM, the Central Bank’s monthly GDP proxy (IBC-Br) for April will come in, for which we forecast a 0.2% mom/sa growth, leading the year-over-year print to 0.6%.


Consumer prices rose 3.1% mom in May, in line with the market consensus forecast and down from 3.4% in April and 4.7% in March. Lower volatility of the exchange rate and tight monetary policy contributed to a modest disinflation. The annualized measure of the last three months consequently decelerated to 55.2% (from 59.5% in April), while the annual reading reached a record high of 57.3%, due to the annual comparison base effect. Core inflation came in at 3.2% mom, down from 3.8% in April and 4.6% in March. At the margin, the core reading is running at an annualized 57.6% (last three months), down from 61.9% in April. On the positive side, the decline in food inflation steepened to 2.4% mom. Inflation on items affected by seasonality contributed to the deceleration of the headline figure, with a 0.6% mom price increase for these products, down from 1.6% mom in April. We forecast 40% inflation by December. This estimate implies continued disinflation ahead, driven by sustained exchange rate stability. However, we note that there may be periods of exchange-rate instability as the presidential election approaches, if market participants perceive a negative outcome in October. ** Full story here.


As approval numbers drop, President Piñera made a second adjustment in 18 months to his cabinet. Think-tank CEP’s political perception survey for May showed that the Piñera administration suffered a major retreat in evaluation, with just 25% of the respondents approving the government (down from 37% in Oct-Nov 2018). Meanwhile, the disapproval rate sits at 50%, up from 39% previously. The slow advance in the reform agenda (amid a lack of majority in either chamber of Congress), the worsening economic environment, and general discontent with the political establishment are likely hurting the administration’s approval. So, it was no surprise to announce a cabinet reshuffle. The changes are in Foreign affairs: Out: Roberto Ampuero, In: Teodoro Ribera (Justice in Piñera 1.0); Economics: Out: Jose Ramón Valente, In: Juan Andrés Fontaine (Repeat from Piñera 1.0, coming from Public Works); Social development: Out: Alfredo Moreno (change), In: Sebastián Sichel; Public works: Out: Juan Andres Fontaine (change to Economics), In: Alfredo Moreno (coming from Social Development); Heath: Out: Emilio Santelices, In: Jaime Mañalich (Repeat from Piñera 1.0); Energy: Out: Susana Jiménez, In: Juan Carlos Jobet (Labor in Piñera 1.0). While the cabinet change will energize the administration, we expect to see only a limited practical impact, especially regarding the advancement of the ambitious reform agenda. 

Macro Scenario: Activity in the first third of the year was sluggish, partly due to supply shocks in the primary sector, but demand-driven activity was also poor. We now expect 2.4% growth this year (3% in our previous scenario; 4% in 2018), and 2.9% next year (3.5% previously), reflecting – besides the weaker-than-expected data – the effects of trade wars on Chile’s open economy. Given a more challenging scenario for activity and still-low inflation, the central bank surprised markets and cut the policy rate by 50 bps to 2.5% in June - the monetary authority indicated the cut was a one-off. A wider output gap and lower neutral interest rate than previously estimated justified the cut. Because we are more pessimistic on the growth outlook for Chile, the output gap is seen widening by more than the central bank’s baseline scenario, warranting additional easing. Given that, we see room for a further 50 bps of easing, although not in the short term. ** Full story here.


Macro Scenario: President Trump threatened Mexico with tariffs on its exports to the U.S. as a way to pressure the country to curb irregular migration. A deal was reached, avoiding the imposition of tariffs. Still, the episode suggests that uncertainty over trade relations with the U.S. will not end even if the USMCA is approved, which is negative for investment in Mexico. At the same time, rating agencies are taking a more negative stance both on Mexico’s sovereign rating and on PEMEX. We revised our GDP growth forecasts for 2019 and 2020 to 1.0% (from 1.4%) and 1.3% (from 1.7%), mainly due to weaker economic activity expected in the US. Uncertainty surrounding the economy will continue to weigh on investment, while employment is already weakening. On the other hand, recent real wage increases are a buffer (though they may make disinflation harder). The central bank is closing the doors on monetary easing for the short term. We expect Banxico to start a normalization cycle only by the last quarter of this year. We believe that with inflation falling within the central bank’s target range, below-potential growth, and a looser monetary-policy stance by the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates and risks for inflation ease. ** Full story here.


In the annual update to its Medium-Term Fiscal Plan (MTFP), the Colombian government retained its fiscal deficit targets for this year (2.4% of GDP) and 2020 (2.2%). This comes despite the Fiscal Advisory Council easing the targets earlier this year (to 2.7% of GDP this year and 2.3% next year) after considering the extraordinary cost of the influx of Venezuelan migrants. Earlier this week, Finance Minister Carrasquilla said the larger deficit allowed by the council would not be used until the full impact of Venezuelans living in Colombia is determined. 

Retaining the 2.4% of GDP fiscal deficit for this year implies recording a primary surplus for the first time since 2012. Overall, the effort (not loosening targets despite permission) is likely, in part, to ease growing concerns by some credit rating agencies. Yet, what in our view is an optimistic growth outlook may likely lead to targets being missed or revisions made at a later stage. Last month, Fitch revised its outlook on Colombia's 'BBB' rating to negative from stable. Low growth (expected at 2.7%) for the next five years was seen as a limitation to the improvement in debt aggregates.  

We note that large differences in growth expectations, lower oil prices expectations and doubt over the expected efficiency savings mean that fiscal challenges remain considerable and debt stabilization will be difficult without reforms. Given the political challenges faced by the administration, comprehensive expenditure cuts or a significant tax reform would not be easily advanced. The intensification of the trade war means lower growth (below 3%) is more likely than what the government is anticipating. 

Day Ahead: At 12:00 PM, activity indicators for the month of April will be published. We expect industrial production to contract 2.0%, despite upbeat oil refining, as a notably high base of comparison and unfavorable calendar effect hamper activity. Meanwhile, retail sales growth is likely to moderate to 4.2% in twelve months (5.3% previously) as auto sales slowed and confidence dropped.

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