Economic Analysis - Pension Reform Defeat Signals Rising Risks - APR 2018

BMI View: Brazil faces rising risks to fiscal sustainability as President Michel Temer effectively shelves pension reform efforts in light of a lack of legislative support. While an alternative set of reforms will offer some support to the business environment, policy uncertainty will remain a weight on investment.

  • Brazilian President Michel Temer's decision to shelve pension reform raises downside risks to fiscal sustainability and highlights the risks of the upcoming general election.
  • Our fiscal forecasts are unchanged, but uncertainty over policy direction will remain a weight on investment over the coming quarters.
  • An alternative set of economic reforms is more likely to progress through the legislature and will offer some upside to the business environment.

The suspension of pension reform efforts highlights the substantial uncertainty surrounding Brazil's fiscal sustainability and policy direction. On February 20, Temer effectively shelved the pension reforms his administration had been pushing for over the last year. While we had seen a narrow window for passage within Q118 ( see 'Policy Uncertainty Coming To The Fore', December 15 2017), the administration still lacks the votes needed to pass the reforms. The reform is extremely unpopular and Temer's coalition has weakened as members position themselves for the October general election. Temer decided to instead address the country's weak security environment by authorising a military intervention in the state of Rio de Janeiro. Because pension reform requires constitutional changes, which are not allowed during a military intervention, it is now off the table, at least temporarily.

We have downgraded Brazil's score on our Short Term Political Risk Index to 55.0 out of 100, from 56.7 previously. This reflects our weakening assessment of the country's 'policy-making process' in light of Temer's struggles to pass a key legislative priority.

Policymaking Weakening As Coalition Wavers
Brazil - Short Term Political Risk Index, Out Of 100
Source: BMI

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