Crucial Pension Overhaul Stalls in Brazil as Vote Postponed

(Bloomberg) -- Brazil’s government threw in the towel on its efforts to vote on a flagship social security reform this year, kicking the bill back to February and raising the prospect that nothing will be done about the country’s ballooning pension obligations until after next year’s elections.

Crucial Pension Overhaul Stalls in Brazil as Vote Postponed

Lower house debate on the constitutional amendment that would rein in Brazil’s pension spending will begin on Feb. 5 and the bill will be put on the voting schedule on Feb. 19, lower house speaker Rodrigo Maia told reporters in Brasilia on Thursday afternoon. Both the currency and the benchmark stock exchange fell on the news, following sharp sell-offs on Wednesday as the chances of a vote dwindled.

President Michel Temer’s efforts to overhaul Brazil’s unsustainable pension system has dominated political debate in Latin America’s largest economy throughout the year. With pressure mounting to pass the unpopular measure before lawmakers start concentrating on 2018 elections, negotiations between the presidential palace and congress reached fever pitch in recent days. The government’s plans started falling apart this week as several policy makers contradicted themselves on the potential vote date while Temer was hospitalized for a surgery.

"We don’t have all the votes now and we’ll have to keep on working," Maia told reporters after a meeting with government allies in Brasilia. "I’m sure we’ll have the votes in February."

Maia added that he’s confident the government will obtain 320-330 votes in favor of the bill, which is more than the 308 needed to secure its approval in the lower house. The legislation would also require Senate backing.

Hopes Fade

Many observers are skeptical it will pass in 2018. "It’s very hard, if they weren’t able to do it this year, the chances fall significantly," said Juliano Griebeler, a political analyst at Barral M. Jorge consultancy. "Leaving it until next year creates a bad situation for the government as it will have to push back other important issues, like tax reform."

Analysts consider the pension reform crucial to manage the country’s rising levels of public debt. If the current rules remain in place, Brazil would end up spending 23 percent of its GDP on pensions by 2060, according to the finance ministry. Failure to approve the bill could also contribute to a further downgrade of the country’s sovereign credit rating, government officials have warned.

"The delay in presenting the pension reform for a vote is credit negative," Samar Maziad wrote in a note for Moody’s Investors Service shortly after Maia’s announcement. "This raises the possibility that the reform will not be approved next year, given political uncertainty surrounding the presidential elections."

Fitch Ratings wrote in a note that the delay highlighted the downside risks included in Brazil’s negative outlook BB credit rating and that the window is closing for significant reforms before the election cycle begins.

Finance Minister Henrique Meirelles told reporters in Brasilia that he would explain the delay to the vote to the ratings agency, and added that the new timetable would allow for more time to discuss the reform.

Meanwhile leaders of the PRB and the PSD, two government-allied parties whose members had been reluctant to back the bill, said the extra time would help build support among wavering lawmakers.

"It improves the situation," said Marcos Montes, the leader of the PSD. "The proximity of the election weighs against it, but there are good chances of approval."

Eurasia Group, meanwhile, has cut the odds of the pension reform bill passing from 40 percent to 30 percent.

"We are still of the view that approval, while more unlikely, is still possible," the consultancy wrote in a report published on Thursday evening.

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