Itaú BBA - Congress debates Social Security Reform

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Congress debates Social Security Reform

marzo 1, 2017

The Lower House Special Committee began its analysis of the Social Security Reform and its progress will continue in March.

The Brazilian economy in February 2017

The Lower House Special Committee began its analysis of the Social Security Reform. The government submitted to Congress its new fiscal recovery bill for states facing serious financial problems. Alexandre de Moraes was appointed the new Supreme Court minister and ministers Eliseu Padilha (on leave) and José Serra left the administration. Economic activity has yet to show signs of a recovery, and unemployment remains high. Inflation consolidated its downward trend and the Central Bank cut the basic rate of interest by a further 75 bps, to 12.25%. The public account deficit remains high, but the current account deficit is stable, financed by direct investment.

The Lower House Special Committee began its analysis of the Social Security Reform

Six sessions of the Lower House Special Committee for Social Security Reform have already been held. The reform’s rapporteur, Artur Maia (PPS-BA), confirmed he will publish his report at the end of March. Initially, the text was expected to be submitted to the committee on March 16, but the Lower House decided to add a further four hearings to the nine that were originally scheduled, as well as a seminar. After the vote on the Special Committee rapporteur’s report, the bill will move on to the floor of the Lower House, where it needs 60% of the votes for approval in two rounds of voting.

New bill to assist recovery of states in serious financial straits

The government sent to Congress the new fiscal recovery bill for states facing serious financial problems. The bill sets out a number of adjustments that states must implement before they are allowed to suspend debt payments to the federal government for up to three years, refinance their debts through the financial system and contract new loans to balance their accounts. The adjustments include: privatizations, increased social security contributions from state employees and various cost-cutting measures. The Rio de Janeiro Legislative Assembly approved a bill authorizing privatization of the Companhia Estadual de Águas e Esgotos (State Water and Sewage Company – CEDAE).

Alexandre de Moraes is the new Supreme Court minister

Former justice minister Alexandre de Moraes took up the seat on the Federal Supreme Court (STF) vacated by Teori Zavaski after he died in an aircraft accident in January. Moraes will inherit the cases that Zavaski was responsible for, but the STF assigned another minister, Edson Fachin, to handle the Carwash Operation. President Michel Temer appointed representative Osmar Serraglio (PMDB-PR) to the post of Minister of Justice. Senator José Serra resigned from the Ministry of Foreign Affairs and Eliseu Padilha, the Chief of Staff, took a leave of absence, both for health reasons.

Central Bank cuts interest rates by another 0.75 pp

The Central Bank Monetary Policy Committee (Copom) cut the benchmark rate of interest by 75 bps once again, taking the Selic rate to 12.25%. In its statement, the Copom left the door open for larger interest rate cuts, saying that any further acceleration of its easing policy will depend on the length of the current cycle, as well as the way that economic activity, risk factors and inflation forecasts and expectations behave, in that order. Significantly, the text also mentions that the length of the cycle will depend on estimates of the Brazilian economy’s “structural interest rate,” which the Committee will reassess over time.

Still no signs of recovery from economic activity…

December figures revealed that economic activity is still retreating. Retail sales fell 2.1% compared with the preceding month, stripping out seasonal effects, while real revenues from the Service sector fell 5.7% year over year. We estimate that fourth-quarter GDP fell 0.6% on the previous quarter – the figures will be released on March 7. For January, currently available indicators (vehicle output, cardboard shipments and vehicle highway flows) suggest industrial output remained stable during the month.

... while in the labor market unemployment remains high 

The labor market deterioration continues. The unemployment rate hit 12.6% in the quarter ending in January, representing an increase from 12.7% to 13.0% after stripping out seasonal effects.

Inflation consolidates its downward trend          

In February, inflation as measured by the IPCA-15 stood at 0.54%, the month’s lowest result since 2012. Year over year, inflation fell from 5.9% to 5.0% and is well below the 10.7% recorded in 2015. The slowdown in prices is widespread but more intense in foodstuff groups. Inflation expectations for 2017 also continued to fall, from 4.7% to 4.4%, and they remained steady, at 4.5%, for 2018.

Government deficit remains high

The consolidated public sector registered a primary surplus of BRL 36.7 billion in January, which was much better than expected, but the 12-month, cumulative primary deficit remains high (2.3% of GDP), as does the nominal deficit (9.2% of GDP). As a result, gross public debt rose 0.1 pp, to 69.7% of GDP.

The current account deficit remains stable, financed by direct investment

In January, the current account deficit totaled USD 5.1 billion. The cumulative 12-month deficit remained practically stable, at USD 23.8 billion (or 1.3% of GDP). Direct investment in Brazil totaled USD 11.5 billion for the month and a cumulative USD 85.0 billion for the preceding 12 months (4.6% of GDP), comfortably financing the deficit.

Another month of rising values for financial assets

The Ibovespa was up 4.0% in dollars and 3.1% in BRL, while country risk as measured by the five-year sovereign CDS fell 27 bps and ended the month at 224 bps. The exchange rate appreciated 0.9%, to BRL 3.09 per dollar.

Upcoming events

The Social Security Reform will continue its progress through the Lower House Special Committee in March. Protests against the Social Security Reform are scheduled for March 8 and 15, and demonstrations in support of Carwash Operation are scheduled for March 26. The Central Bank publishes its first-quarter inflation report on March 30.



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