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Financial News: BRAZIL: Delay In Pension Reform May Halt Rate

BRAZIL: Delay In Pension Reform May Halt Rate Cuts By The Central Bank

10/17/2017 - 18:46:00 (RTTNews)

(RTTNews) - The delays faced by the pension reform bill in Brazil's Congress should restrain the central bank's monetary policy committee ability to cut the benchmark interest rate or even halt that effort if legislators wait until 2019 to vote on the legislation.

Market players in Brazil are worried about how the delay in congressional approval of the pension reform would reverberate in monetary policy decisions in the face of uncertainties related to next year's presidential election. They claim that if Congress found obstacles to move forward with the legislation this year, it may find even harder to pass the bill in 2018.

For this year, the monetary policy horizon is much foreseeable. The primary interest rate, known as Selic, should end 2017 at 7%, even with the market already starting to price that the pension reform will not come true in the near term. However, the public budget health remains an issue, leaving Brazilian economic scenario in a critical state.

The most recent data shows that the Brazilian government primary deficit surged to R$ 60.85 billion in 2017 until August - the worst result ever recorded. Economic reforms, such as the pension bill, are considered the best shot to reduce the gap in public accounts and allow the country to resume growth.

Matheus Gallina, a fixed-income trader at Quantitas, says that markets have already absorbed the near-term impact of the economic reforms adopted so far by the Brazilian government.

"The concerns orbit around the next year's events, since without a pension reform approval the public accounts situation would be aggravated. The delay to vote the pension system reform bill] may lead to a higher than expected increase in the Selic rate by the end of 2018, after elections," he said.

Brazil's Finance Minister Henrique Meirelles reiterated last week that "it is better for all that the reform be approved immediately."

Silvio Campos, an economist at Tendências Consultoria, stated that market agents are already considering the possibility of the Congress rejecting the current pension reform bill or passing a much weaker version of the reform.

"But even with no reform at all, we should not see very significant impacts on markets in the short term," he said.

Patrícia Pereira, a fixed income manager at Mongeral Aegon Investimentos, said that the absence of changes in the Brazilian pension system could hamper a more intense reduction in interest rates.

"With the reform, the fiscal deficit would be more relieved, and the neutral interest rate could be lower, so the Selic would fall a little more," she said.

Further delaying approval would aggravate the matter, says Jason Vieira, the Infinity Asset's chief economist.

"The reform would provide the Central Bank with fiscal comfort to keep cutting interest rates, but even without the approval, the short term gives comfort to the authority in inflationary terms to maintain such a policy. Leaving the reform for 2019 becomes a problem. In the next year, meanwhile, the situation would be less challenging," he said.

However, few analysts believe that reforms could advance in Congress in 2018. "The stakes for a robust reform would be transferred to 2019, when a new government could tackle the issue with more support. The postponement would be negative, but it is important to note that a 2019 approval would become mandatory," Campos said.

The central point, according to economists, is the country's fiscal health, which should only improve with reforms. "The prospect of a reversal of the serious fiscal framework depends necessarily on changes in the rules. Otherwise, markets will return to work with a situation of lack of control, pressures on assets and the impossibility of keeping interest rates at lower levels in the coming years," Campos said.

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