Brazil Passes Flagship Pension Reform to Shore Up Finances
Brazil Passes Flagship Pension Reform to Shore Up Finances
(Bloomberg) --
Brazil’s Senate took the final step in the approval of a long-awaited pension reform that’s the centerpiece of President Jair Bolsonaro’s plans to cut government debt.
Lawmakers on Wednesday gave the final go-ahead to legislation that will save public accounts approximately 800 billion reais ($197 billion) in a decade. They also backed an amendment benefiting employees under harsh work conditions that may reduce those savings, although its impact wasn’t clear. While the government had initially forecast a fiscal impact of as much as 23 billion reais, a new law regulating access to the benefit may change that estimate.
The new retirement rules are expected to come into effect as soon as Davi Alcolumbre, as head of Congress, signs them into law over the next few days.
Brazil’s real hit a session high on the news, strengthening 0.8% to 4.0520 per U.S. dollar in early-afternoon trading. Meanwhile, the benchmark Ibovespa stock index erased losses.
Pension reform represents the cornerstone of Bolsonaro’s economic policy and the focus of his first sustained legislative drive. The bill is crucial for investors who have expressed alarm over deteriorating public finances in Latin America’s largest economy. But while the legislation attacks one of the biggest culprits of Brazil’s rampant budget deficits, other measures are needed to gain better control of spending.
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Before Bolsonaro, four previous presidents had tried and failed to implement a broad overhaul of the country’s pensions, which gobble up roughly 8.6% of gross domestic product. Still, officials were only able to rally congressional support with the backing of lower house Speaker Rodrigo Maia and after making significant concessions.
The military was left out of the reform, as were states and municipalities, and plans to establish individual savings accounts were shelved. When put together, the alterations reduced the bill’s projected savings from an initial target of over one trillion reais.
Bolsonaro has said the legislation is essential for economic growth, while his Economy Minister Paulo Guedes has said it will buoy investor confidence and help attract new investment. But there’s no shortage of challenges ahead.
Brazil’s public debt stands at nearly 80% of GDP, a figure that’s much higher than other emerging markets including Mexico, Chile and Indonesia. Even considering pension reform approval, that ratio won’t start falling until 2023, according to government estimates.
Roughly 90% of public spending is mandated by the nation’s Constitution, meaning that budget flexibility is minimal. Furthermore, Brazil’s economic growth projections are hovering around just 1% for the third straight year, further hindering efforts to reduce debt.
To contact the reporters on this story: Samy Adghirni in Brasilia Newsroom at sadghirni@bloomberg.net;Murilo Fagundes in Brasilia at mfagundes3@bloomberg.net
To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Matthew Malinowski
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