Itaú BBA - Social Security Secretary signals ambitious pension reform in Brazil

Latam Talking Points

< Back

Social Security Secretary signals ambitious pension reform in Brazil

February 15, 2019

We still don’t have all the details on the final proposal, but it is shaping out to be ambitious

Talk of the Day


According to Social Security Secretary Rogerio Marinho’s remarks on the local news source Broadcast, the President has taken the final decision on the pension reform. It will be announced by the President and sent to Congress on February 20th (Wednesday next week). The President approved setting a minimum retirement age of 65 for men and 62 for women, with a transition in 12 years. Previously, the economic team had defended 65 years for both genders with a 10-year transition. Marinho’s remarks came after a meeting with Bolsonaro and Guedes aimed at taking a final decision on the pension reform. We still don’t have all the details on the final proposal, but it is shaping out to be ambitious, with a faster transition to the new retirement age than contemplated in the reform currently in Congress.

According to the IBGE’s monthly services survey (PMS), services sector real revenues rose 0.2% mom/sa in December. In year-over-year terms, the indicator came at -0.2%, above consensus and our forecast (-0.5% and -1.2%, respectively). The breakdown shows mom/sa declines in 4 out of 5 sectors (see table). After several negative signs for 4Q18’s GDP, this print should be mildly positive - increasing GDP trackings by ~ 4-10 bps. Nonetheless, it fails to offset the impact of December’s retail sales (released yesterday).

In December, Itaú Unibanco monthly GDP (PM-Itaú) declined 0.7% mom/sa while expanding 0.9% yoy. From a demand standpoint, household spending as well as fixed capital investments retreated in December (-0.7% and -1.5%, respectively). For January, we forecast, for the time being, growth of 0.4% mom/sa in PM-Itaú.  ** Full story here.

Day ahead: December’s IBC-Br will be released at 8:30 AM (SP Time), we expected a 0.1% monthly decrease, which translate to -0.4% yoy.


The minutes from the January monetary policy meeting show an increasingly more cautious central bank. The board is uncomfortable with the disappointing growth in core economies and lower-than-expected inflation at home, while it is less certain on structural parameters – such as neutral rates and potential growth – that guide policy decisions. Although the board unanimously voted to hike the policy rate by 25-bps (to 3.0%), many board members indicated there are multiple paths consistent with the 4Q Inflation Report (IPoM). This suggests that the central bank could take a more cautious approach in the short-term even if it opts to maintain the goal of fully normalizing monetary policy by the first half of 2020 (something that is becoming less likely, in our view).

We believe that weaker activity momentum at the beginning of the year, short-term uncertainty of inflation dynamics following the introduction of the new CPI basket and still elevated external risks support a more cautious central bank. Hence, we expect the upcoming IPoM to reinforce a flexible rate guidance, in line with the posture adopted by other central banks. We still see space for two rate hikes (to 3.50%) during the second half of the year, but risks are tilted to fewer hikes.  ** Full story here.


Inflation accelerated in January despite the appreciation of the nominal exchange rate. Consumer prices rose 2.9% mom from December, above the 2.5% Bloomberg consensus forecast. Monthly inflation slowed in the last months of 2018 – to 2.6% in December from 3.2% in November, 5.4% in October and 6.5% in September – but this trend was interrupted in January. The annualized three-month measure decelerated to 40.4% in the month (from 54.6% in December), but the annual reading accelerated to 49.3% (from 47.6% in December), the highest reading since 1991.

Food prices drove core inflation up. Core inflation came in at 3.0% mom (up from 2.7% in December), led by food and non-alcoholic beverages (mainly meat prices). Annual core inflation jumped to 49.9%, from 47.7% in December. 

Regulated prices rose, while prices affected by seasonality moderated. Regulated prices rose 3.4% mom, from 2.6% mom in December, led by increases in water services, cigarettes and public transport, partly offset by a reduction in gasoline prices. The annual reading rose to 55.4%, from 53.5% in December. Inflation of items affected by seasonality rose 1.1% mom, the lowest month-over-month reading since April 2018, bringing the annual reading to 33.1% (from 35.1% at the end of 2018).    

Regulated prices will pressure inflation again in February. Price-tracker consulting firm Elypsis estimates a 3.8% mom increase in consumer prices for the second month of the year, due to adjustments in electricity tariffs, public transportation fares, health services and gasoline prices. We note that the Leliq rate has dropped sharply year to date, to 45%, from 59% at the end of 2018. Considering the challenging inflation scenario and the beginning of the wage negotiations, amid a stable monetary base target, interest rates are unlikely to fall significantly further.


Activity at the end of the year came in mixed, with retail sales remaining dynamic, while industrial production surprised to the downside. Retail sales grew 7.0% yoy (11.2% in November), below the 8.4% market consensus and our 8.0% forecast. Meanwhile, industrial production contracted 0.8% yoy (+4.7% in November), considerably lower than the market consensus (+4.9%), and our +4.0% estimate. Overall, mixed signals continue to show that the activity recovery is yet to consolidate (as shown by the still-low growth of the coincident activity indicator, ISE, of 2.7% for the 12 months ending in November). Hence, with the negative output gap continuing to widen, while inflation expectations remain broadly anchored, we expect the board to keep monetary policy mildly expansionary for most of this year. 

We expect an activity pick-up this year to 3.3% (2.6% in 2018), aided by a mildly expansionary monetary policy. However, slowing growth for major trade partners and lower average oil prices mean that risks for our growth forecast are tilted to the downside.  ** Full story here.

A twelfth consecutive trade deficit was registered in December, leading to a widening of the trade deficit last year (ending two years of correction). Imports continued to recover in the final quarter of 2018, growing at a double-digit rate. Meanwhile, low oil prices hampered exports and poses a risk to the external accounts. The trade deficit in December was USD 587 million (market consensus: USD 668 million; our call: USD 800 million), a reversal of the USD 517 million surplus recorded one year earlier. As a result, the trade deficit for 2018 was USD 7.1 billion, up from the USD 6.1 billion in 2017. The correction of the trade deficit reverted during the back end of 2018, as falling oil prices led to a diminished energy trade surplus, while the non-energy deficit widened. At the margin, the annualized trade deficit (using our seasonal adjustment) increased from USD 5.3 billion in 3Q18 to USD 9.9 billion in 4Q18, as export growth slowed. 

Low oil prices and a slowing global economy are hampering the outlook for an external-account correction. We see the 2018 and 2019 current-account deficit coming in at 3.6% and 3.5% of GDP, respectively, up from the 3.3% level in 2017. The central bank has raised concern on the expected rise of the deficit. Previously, an elevated current account deficit prevented the board from moving to an expansionary monetary position despite activity weakness. ** Full story here.


Day ahead: The statistics institute (INEI) will announce December’s GDP proxy. We estimate that it expanded 4.3% yoy, from 5.3% in November.

< Back