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Brazil Just Lopped $193 Billion Off Spending But Needs Much More

Brazil Just Lopped $193 Billion Off Spending But Needs Much More

(Bloomberg) -- President Jair Bolsonaro has called its passage essential to prevent the collapse of the Brazilian economy. His top financial aide has labeled it his number one priority. And the speaker of the lower house, overcome with emotion, choked back tears when it cleared a key legislative hurdle a few months ago.

Yes, the pension reform bill that won final congressional approval on Wednesday after years and years of debate is a big deal, saving the cash-strapped government almost $200 billion over the next decade.

But, economists warn, it’s not enough to quickly rein in a ballooning debt load -- ratios won’t start falling for another four years -- that’s undermining confidence in Brazil’s finances. Bond investors today roughly assess Latin America’s biggest nation the same way they see a tiny and troubled country like Guatemala. To shore up sentiment further, Bolsonaro’s administration needs to move fast on other reforms that will ignite growth in a sputtering economy, a crucial part of any effort to contain debt-to-GDP levels.

Given how tough it was to get the pension reform passed, though, winning timely approval for more flexible government spending rules and curbs on public servant salaries will be no small feat.

"Pension reform allows for a reduction in the pace of public spending growth," said Newton Rosa, chief economist at Sul America Investimentos Dtvm. "It is a necessary measure. But it’s not enough."

Brazil Just Lopped $193 Billion Off Spending But Needs Much More

Debt as a percentage of gross domestic product will only enter a "modest downward path" in 2023, according to the Institute of International Finance. In a separate outlook published before recent changes that reduced the pension reform’s savings, Brazil’s government said gross debt will fall from 82.2% of GDP in 2022 to 71.6% in 2028, a figure that’s roughly double current levels in Mexico and Indonesia.

Historic Moment

Brazil’s Senate gave the final go-ahead to the legislation which establishes a minimum retirement age and toughens access to some social benefits. It caps a tumultuous eight-month process marked by intense negotiations, multiple votes and numerous concessions to assure the bill’s passage.

Brazil Just Lopped $193 Billion Off Spending But Needs Much More

Brazil spends much more on its pensions than peer countries and current rules allow many workers to retire as early as in their 50s. That reality, coupled with an aging population, has lead to multi-billion dollar deficits in pension funds that are driving public debt to unsustainable levels.

"We are doing things with the right timing," Economy Minister Paulo Guedes said in an interview on Monday. "First, we needed to take care of pensions, which are black holes that drained resources."

Amid expectations of the reform’s approval, Brazil’s benchmark Ibovespa stock exchange surged to a record high, while the real gained and a key measure of country risk fell. Despite initial opposition to the reform from labor groups, the bill’s final approval sparked no concern of social unrest that’s rattling other countries in the region.

Aside from reining in social security spending, the reform can help Brazil by boosting confidence and helping economic growth, according to the IIF. "Even more importantly, the reform would signal ability to tackle difficult issues," IIF analysts wrote in a report this month.

Crunch Time

There’s certainly no shortage of challenges going forward when it comes to Brazil’s fiscal policy. The government doles out some 300 billion reais per year in subsidies which drain public accounts and need to be pared back, according to Rosa.

GDP growth that’s seen hovering around just 1% for the third straight year now and not surpassing 2% in 2020 is slowing efforts to curtail debt. Latin America’s largest economy hasn’t posted a primary surplus -- which excludes the cost of servicing its debt -- since 2013.

What Our Economist Says

Brazil hasn’t seen decent economic growth in 5 years and, even with lower borrowing costs, debt levels won’t stabilize or fall while there’s no surplus in public accounts. Pension reform by itself won’t end deficits. To do that, it’s necessary to slow growth in other obligatory expenditures, such as public servant salaries. That’s why there’s more talk now of administrative reform.
--Adriana Dupita, Latin America Economist, Bloomberg Economics

Roughly 90% of government spending is mandated by the country’s Constitution, meaning these little wiggle room to cut outlays if not through a drawn-out amendment process. Put together, officials are struggling to stay within the bounds of current legislation regulating public spending.

"There’s consensus that the old model didn’t work," said Marcelo Carvalho, head of global emerging market research at BNP Paribas. "It’s crunch time. You can’t avoid reform any longer."

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, ;David Papadopoulos at papadopoulos@bloomberg.net, Matthew Malinowski

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