Bankers Cheer End of Brazil Pension Saga (and Now Want More)

(Bloomberg) -- Brazil’s top banking executives were unanimous in cheering the approval of a long-delayed pension overhaul -- and quick to line up what they think should be the government’s next priority.

With the top item on their wish list now crossed off after years of debates, bankers from Itau Unibanco Holding SA to Banco BTG Pactual SA are now championing reforms to the rules governing civil servants’ costly benefits, including changes to compensation, productivity metrics and dismissal policies.

“The social security reform, now approved, together with the administrative reform which will be discussed next year, mark the final steps of financial stabilization which began in 1994,” said Roberto Sallouti, chief executive officer at BTG. “The country can now focus on the productivity agenda, improving GDP per capita and the lives of Brazilians.”

Brazil’s Senate gave the final go-ahead to the legislation, which establishes a minimum retirement age and restricts access to some social benefits, seen as needed to fix the country’s deteriorating fiscal accounts. The Wednesday vote caps a tumultuous eight-month process marked by intense negotiations, fierce pushback and numerous concessions to assure the bill’s passage, saving the cash-strapped government almost $200 billion over the next decade.

Though most investors said the approval was pretty much priced into Brazil assets, markets reacted positively to the news. The real is leading gains among emerging-market currencies this month, while bond risk measured by five-year credit default swaps is on its best run since 2003.

The next item on bankers’ priority list is likely to be another uphill battle. Brazil spent around 725 billion reais ($182 billion) on its civil servants in 2017, according to a World Bank report, with monthly salaries that are usually 96% larger than an equivalent position in the private sector, the data show.

“It’s crucial that the government and Congress continue to advance on other fronts, such as administrative and tax reforms, as well as measures that generate savings and increase competition,” said Sergio Rial, Banco Santander SA’s Brazil unit chief.

Further reforms are seen by bankers as key to getting the economy growing faster. Candido Bracher, chief executive officer at Latin America’s most valuable lender, Itau Unibanco Holding SA, said pension reform “was a necessary though insufficient step for Brazil to raise its growth potential.”

Brazil’s economy is expected to expand around just 1% for the third straight year, and at 2% in 2020, according to estimates compiled by Bloomberg.

Economy Minister Paulo Guedes has an ambitious agenda to downsize the state -- very much in line with what finance executives say Brazil needs. In an interview this week, Guedes said he would prioritize oversight of the country’s public sector budget once the government had secured approval of the pension bill. The “state transformation agenda” includes establishing a so-called fiscal council of the republic, administrative reforms and a tax overhaul -- though the latter would be sent in a later time.

Read More: Brazil Needs to Avoid Shortcuts in Path to Growth, Guedes Says

Though most of bankers highlighted the need for more, some see the pension bill approval in itself as a catalyst for optimism. Guilherme Benchimol, chief executive officer at XP Investimentos SA, the nation’s biggest retail brokerage, called it “a first fundamental step to demonstrate the level of commitment of the Brazilian government and congressmen to the public accounts,” adding that the nation is entering “a long and solid economic growth cycle.”

In a government that often finds itself embroiled in controversies -- from political infighting to environmental issues -- the reform approval “allows for a constructive narrative in relation to a positive agenda for Brazil,” said Octavio de Lazari, chief executive officer at the nation’s second-biggest bank by market value, Banco Bradesco SA.

“Brazil’s growing reliability in global markets will have a noticeable effect on attracting more investment flows for the stock market and direct investments,” he said.

©2019 Bloomberg L.P.

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