Brazil pension climbdown rebuked by rating agencies

    The Brazilian government’s decision to shelve an overhaul of the country’s generous pension system is a blow to its creditworthiness, rating agencies warned on Tuesday.

Economists and investors reacted with disappointment to the news that the government had called off a congressional vote on the reforms as it concentrates on tackling violence in Rio de Janeiro.

That decision potentially punts the issue of the unpopular reforms beyond general elections in October.

‘The failure to put the social security reform to a vote reflects the challenges of implementing corrective policies in a complicated political environment and against the backdrop of an impending election cycle,” said Shelly Shetty, head of LatAm sovereigns at Fitch. “Downward pressure on the sovereign rating of Brazil continues.”

The first vote on a constitutional amendment that would reform a system the World Bank expects to consume the entire federal budget by 2030 had been set to take place on Monday.

    We erred in the way we communicated the benefits of this reform, this will cost the country dearly
    Senior Brazilian official

But Friday’s move by President Michel Temer to hand control of Rio de Janeiro’s security to the military to curb a violent crime wave has, in effect, blocked its passage. The country’s constitution cannot be tweaked while a federal intervention is in force.

“While we already expected that a major pension reform was unlikely, ditching off the plans to pursue its approval is a credit negative development that will severely restrict the authorities’ ability to comply with the government spending ceiling in the coming years,” Moody’s analyst Samar Maziad told clients.

Mr Temer has made pension reform the centrepiece of his agenda. Amid stock market highs, he has been touting the country’s recovery from a brutal recession, including a double-whammy of low interest rates and consumer prices.

A year ago he looked close to passing a comprehensive pensions overhaul. But last May he was accused of corruption and was forced to focus political capital on fighting congressional votes on whether he should be tried for graft.

Government efforts to put pressure on lawmakers ahead of a pensions vote, alongside a public-relations campaign praising the benefits of the reform, proved futile. As they prepare to fight for their seats at October’s general election, many legislators want to avoid an unpopular reform of a generous system in which workers can retire as early as their mid-fifties.

Goldman Sachs economist Alberto Ramos said that a new administration, which will be sworn in next January, will have “no other option but to swiftly tackle” the pension issue.

“We were of the view that the pension reform would likely not be approved by this administration, at least a comprehensive reform that would address the very large imbalances we see today and which are likely to grow even larger in the future,” he said. “But reforming social security is inescapable.”

A senior Brazilian official acknowledged that “we erred in the way we communicated the benefits of this reform, this will cost the country dearly”. The burden of the fiscal imbalances, the official added, would make the life of the next president “very tough”.

Carlos Marun, political affairs minister, admitted on Monday that “we don’t have enough votes” to push through the reform. Congressional insiders have said the government could have scratched between 270-280 votes, versus the 308 needed, and Mr Temer was unwilling to risk defeat.

Officials will now focus on pushing through Congress other parts of the reformist agenda, including the privatisation of electricity generator Eletrobras.

“There were many accidents on the road to the pension reform and the bill started to get expensive,” said Marcos de Barros Lisboa, president of São Paulo’s Insper business school. “In addition, the fragility of the government alienated possible allies.”

Mr Lisboa said that the other reform measures are further advanced. “Who knows, we may see some progress now.”

Finance minister Henrique Meirelles, who many believe has presidential ambitions, said that “the commitment to the pension reform is maintained”, hinting the government could still try to put it to a vote if there’s a window later this year.

The yield on the Brazilian government’s US dollar-denominated 10-year bond rose 11 basis points to 4.9 per cent on Tuesday and the real slipped 0.5 per cent versus the US dollar, but the benchmark Bovespa stock market was higher.