Delays to Brazil's Pension Overhaul Raise Economic Concerns

05/08/19 12:54 PM EDT
By Paulo Trevisani and Jeffrey T. Lewis 

BRASÍLIA -- Brazilian President Jair Bolsonaro's slow-moving effort to get a pension overhaul approved in Congress has left the country's already struggling economy in limbo as businesses, consumers and markets wait to see when, and in what form, the proposal will finally be approved.

Delays in getting the pension bill approved by lawmakers are fueling doubts about the administration's ability to right the economic ship at a difficult moment for Latin America's largest nation.

In a busy trading district in São Paulo, Brazil's largest city, Adilson Carvalhal Jr.'s family-owned import business is being slammed by a weakening currency and the 13% unemployment rate.

"My costs have increased 20% [in two years] because of the stronger dollar," Mr. Carvalhal said in a bare-bones office in his sprawling warehouse stocked with Argentine wine, German beer, Spanish cheese and other imports. "How can I pass that along to the consumer if the economy is tanking?"

The only bright spot for him and millions of other businesspeople and consumers comes from Brazil's central bank, which on Wednesday is expected to hold its benchmark interest rate, known as the Selic rate, at the historic low of 6.5% where it has been at since March, 2018.

Even though lending rates for most businesses and individuals are much steeper than that, at least they are relatively stable thanks to the unchanged Selic, which was more than twice as high at 14.25% just three years ago.

But the confluence of faster inflation, the outlook for slow growth and the slow-moving effort to cut the pension system's deficits is making it harder to predict where the economy will go over the next few months.

"It's all very confusing right now," said André Perfeito, chief economist at brokerage firm Necton. "Pension reform is under attack in Congress and the economy is fragile."

A major source of turbulence is the country's fractious political scene, where 28 parties fight for power in Congress. Brazilian presidents have traditionally built majorities in Congress by offering lawmakers coveted government jobs and funding for their pet projects.

Firebrand right-wing President Jair Bolsonaro broke with that practice, a move cheered by supporters wary of the widespread corruption stemming from pork-barrel politics.

But his administration, plagued by rows among different factions, was left without a clear base of support just as the controversial pension-overhaul plan proposed by Economy Minister Paulo Guedes began to be discussed by lawmakers. The bill took about two months to get a vote in a key committee, and has now moved on to a different committee.

"Growth will resume when pension reform is approved," Mr. Guedes told reporters earlier this week. Brazil suffered through a deep recession in 2015 and 2016 and has barely grown 1% a year since. Recent indicators have pointed to a possible contraction in the first quarter of this year.

The pension overhaul aims to plug a gaping shortfall that is consuming taxpayer funds to the tune of $60 billion a year, forcing the government to borrow to pay retirees. Brazil's debt is close to 80% of gross domestic product, raising concerns about the country's fiscal stability among investors.

"We're spending more than we take in, and that's a long-term problem," said Pedro Coelho Afonso, chief economist at São Paulo investment adviser PCA Capital. "Reforming the pension system will help with the fiscal problem. Once it's passed...companies will be more likely to hire, and with more clarity, to invest."

Mr. Carvalhal, the importer, shares that hope.

"Brazil is ready to take off, we just need pension reform approved to get more clarity about the future," he said. "We need to start moving on."

But the plan, which mostly cuts benefits enjoyed by generations of public servants, faces strong opposition from leftist political parties and influential labor organizations.

"They can't roll back rights acquired over the years," said Bruno Mota, 69, who works for federal courts in the northeastern state of Pernambuco but was in Brasilia earlier this week with a labor group lobbying lawmakers to vote down the government's proposal. "We are not privileged. We serve the country."

Doubts about the overhaul's fate are fuelling volatility in equity and currency markets.

On Wednesday, ahead of Mr. Guedes being questioned by lawmakers over his proposed overhaul, the Brazilian real closed at 3.93 per dollar. It has lost around 10% of its value in a year and about 20% over two years. The benchmark iBovespa stock index seemed poised to surpass 100.000 points earlier this year, but is now at 96,296.7, thanks to uncertainty about the overhaul.

The weakened currency hits Brazilian consumers hard. For example, global oil prices have fallen in the past 12 months. But they are set in U.S. dollars, which have become more expensive in Brazilian currency.

That means drivers are paying 6% more at the gas pump, raising fears of a repeat of last year's crippling truckers strike, when drivers blocked highways around the country and shut down deliveries of supplies to shops, factories, hospitals and other places.

Consumer prices are rising at a 4.58% annual pace, up from 3.75% in December. Economists still expect inflation to end the year below the central bank's 4.25% target, but they have been raising their forecasts.

Growth prospects, meanwhile, are going in the opposite direction, with analysts slashing their 2019 GDP forecast to 1.5% from 2.53% in January. Many now say the economy probably contracted in the first quarter.

While rising prices usually call for higher borrowing costs, slow growth tends to be fought with lower interest rates, a conflict that has forced the monetary authority into a corner. The political turbulence has also left central bank on hold, since the outcome of the pension overhaul is uncertain.

The conundrum is paralyzing the Brazilian consumer as well.

"I'm worried about the economy, and I'm not making plans" to spend a lot of money any time soon, said Fabio Oliveira, who works for an information-technology services company in São Paulo.

The company's owner tells employees almost every week that clients are holding back investment plans while waiting to see the outcome of the pension-overhaul effort, Mr. Oliveira said, adding that he expects to muddle through.

"Brazilians are used to dealing with crises," he said. "One ends and then another one begins."

Write to Paulo Trevisani at paulo.trevisani@wsj.com and Jeffrey T. Lewis at jeffrey.lewis@wsj.com

 

(END) Dow Jones Newswires

May 08, 2019 12:54 ET (16:54 GMT)

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