Brazil Warms Up `Old, Cold Coffee' After Pension Bill Fails

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(Bloomberg) -- With the Brazilian government’s flagship reform program scuttled, President Michel Temer is reviving a number of milder economic measures in an attempt to offset investor disappointment.

The proposals are still likely to prove ambitious given his depleted political capital. Only a handful, such as the privatization of Eletrobras, Latin America’s largest utility, stand a decent chance of becoming law. Others, such as an overhaul of two key federal taxes known as PIS/COFINS, look like long shots, according to three party leaders and several government officials contacted by Bloomberg News. House Speaker Rodrigo Maia, who is usually aligned with Temer’s economic agenda, compared the 15 proposals to "old, cold coffee".

Delays in plugging gaping deficits and in downsizing a bloated state will weigh on growth prospects for Latin America’s largest economy, after the worst recession on record. Fitch on Friday cut Brazil further into junk, an indication that it may be years before the nation recovers investment grade status. The poor standing of market-friendly candidates in opinion polls is also beginning to unnerve some investors, as the October general elections approach.

Since scoring several legislative wins at the start of his term, Temer has watched his congressional support erode amid a slew of corruption allegations and record low popularity. Earlier this month, the government shelved its proposal to cut pension outlays as legislators balked at supporting austerity measures in an election year.

"It doesn’t make sense to push the limits because there’s a battle in Congress related to elections," Nilson Leitao, the lower-house leader of the government-allied PSDB party said in an interview. "Campaigning can be complex and take a lot of time, dedication and energy. That may hinder efforts to advance the priority measures."

House Speaker Maia has said that the end of payroll tax breaks, creation of a positive credit history registry and a measure digitizing certain types of credit notes have the highest chances of passing, and that view is shared by Temer’s inner circle, according to a cabinet member. Temer is prepared to make a personal appeal for the privatization of state-controlled Eletrobras despite any controversy it may create, the official said.

Both that measure and central bank autonomy will require lengthy discussions with legislators, Domingos Neto, the lower house leader of the government-allied PSD, said in an interview. However, all of the proposed bills would require just a simple majority in the two houses of Congress rather than the three-fifths needed for the constitutional amendment to alter Brazil’s pension system.

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Talks between Maia, the government and allied party members will get under way in the next few days. With a little bit of luck, the government may succeed in passing seven or eight of the proposals, according to a member of the economic team.

But while none of the measures are as controversial as the pension reform, the pursuit of various bills simultaneously brings its own risks, according to DEM party lower house leader Rodrigo Garcia.

"There’s disengagement in the government camp," Garcia said in an interview. "When you have one objective and only one focus, efforts are more concentrated. You end up undercutting that with an agenda that’s more diffuse."

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