Economic Analysis - Reforms Likely To Disappoint - SEPT 2017

BMI View : Although likely to remain in office, Brazilian President Michel Temer will struggle to deliver on his ambitious reform agenda. Labour reform will introduce some flexibility, but pension reform will likely need to be re-addressed by the next administration.

Brazilian President Michel Temer's diminished political capital will lead to a substantial weakening of key proposed reforms, principally to the pension system and labour market. Although Temer's coalition remains behind reform, as legislators believe that failure would stifle the economy's recovery and undermine their electoral chances in 2018, the window of opportunity is unlikely to extend past end-2017. Temer's historic unpopularity, public pushback and the looming general election campaign will sap legislators' willingness to pursue deeply unpopular reforms.

As a result, the next administration is likely to inherit an unsustainable policy mix, particularly regarding fiscal policy. At the same time, the public's deep dissatisfaction with the political elite will create opportunities for outsider candidates in next year's general election ( see '2017-2018 Elections: Policy Direction Hangs In The Balance', April 27). Taken together, uncertainty over policy direction heading into 2018 is likely to weigh on investment and growth.

Reform Could Support Labour Market Recovery
Brazil - Key Labour Market Indicators
Source: BCB, BMI

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