What’s at Stake With Brazil’s Pension Bill

Updated on
  • Failure to approve bill may prompt monetary policy tightening
  • Brazil government seeking to start pension bill vote this year

Brazil’s Congress may vote in coming weeks on President Michel Temer’s flagship proposal to cap pension spending. Since it was first presented to Congress a year ago, the proposal has been watered down several times in an attempt to secure support the three-fifths majority needed in both houses.

The Temer administration now expects to guarantee at least 50 percent of the 750-800 billion reais ($230-246 billion) in savings envisaged over a decade in the original proposal. The following charts show what impact the proposal may have on Latin America’s largest economy.

The watered-down proposal won’t generate half the savings in a decade that the original proposal would have. But without it, investor expectations on stabilizing public accounts would deflate sharply as growing pension costs would drive government spending through the newly-adopted constitutional limit. "The government needs to make the budget fit under the ceiling," said Braulio Borges, a researcher at the Getulio Vargas Foundation’s economics institute Ibre.

The failure to approve even a watered down pension bill and bring government spending under control would put pressure on the currency, spur inflation, and force the central bank to tighten monetary policy, said Carlos Pedroso, a senior economist at Banco de Tokyo-Mitsubishi UFJ Brasil in Sao Paulo.

"The central bank would have to become contractionist," said Pedroso. "It would likely use a larger dosage of rates, maybe something around 10 percent." (The benchmark Selic rate is currently at 7.5 percent).

With the pension bill somewhat eroded and delayed, the market view on Brazil’s debt levels has soured. Economists surveyed by the central bank have increased their net debt forecasts for the next four years since corruption allegations against Temer arose in May and sidetracked debate on the reform. Moody’s analyst Mauro Leos said in Sao Paulo on Tuesday that Brazil’s debt-to-GDP ratio is much higher than that of its peers.

"Debt could reach 100 percent of GDP in 2020 without the reform," said Elcio Gomes, chief economist at Banco do Brasil.

— With assistance by Marco Maciel, and Bruce Douglas

    Before it's here, it's on the Bloomberg Terminal.