The Brazilian government posted a fiscal surplus of 46.9 billion reais ($12.5 billion) in January, the central bank said on Thursday, above forecasts but unchanged from a year earlier.

In Brazil, January is traditionally marked by higher tax revenues and lighter spending, so these figures do not change the fragile outlook for public finances, analysts said.

The primary surplus, comprising the central government, regional governments and state-owned enterprises before interest payments, exceeded the 34.3 billion reais median forecast in a Reuters poll of economists.

For the 12 months to January, the primary deficit was equal to 1.57 percent of gross domestic product (GDP), the central bank said, a figure that analysts call worryingly high.

“Overall, the fiscal picture remains very weak, despite the effort over the last two years to contain discretionary spending and the significant retrenchment of public investment,” said Alberto Ramos, head of Latin America research at Goldman Sachs.

“A deep, permanent, large structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance,” he wrote in a note to clients.

Brazil’s gross public sector debt in January was 5.3 trillion reais, or 76.7 percent of GDP, unchanged from the month before, the central bank said.

Ramos warned that public debt is on track to hit a “disquieting” 80 percent of GDP before stabilizing, leaving the economy with little wiggle room to cope with adverse shocks.

Earlier on Thursday, data showed that Brazil’s economy almost ground to a standstill at the end of last year, with economists warning that the weak momentum is likely to carry on into this year.

President Jair Bolsonaro’s cornerstone economic proposal is a pension reform bill he delivered to Congress this month, which would raise the minimum retirement age in an effort to save more than 1 trillion reais over the next decade.

Thursday’s figures showed a surplus of 35.6 billion reais from the central government, 10.8 billion reais from regional governments and 507 million reais from state-run firms.


Source: Reuters

Brazil’s Economy Ministry warned on Friday that the economy will slip into recession next year and official interest rates could more than double unless Congress approves measures to reduce the deficit in the country’s pension system.

The warning comes days after President Jair Bolsonaro presented his ambitious social security reform plan to Congress, which aims to save over 1 trillion reais ($295 billion) in the next decade.

Overhauling the creaking social security system is seen as critical to shoring Brazil’s public finances, boosting investor confidence, fostering growth and keeping interest rates and inflation under control, most economists say.

In its first official forecast on the potential impact on the economy over the next five years of reform or no reform, the Economy Ministry laid out starkly contrasting scenarios.

“In the event of no pension reform, GDP growth in 2019 will be 1 percent lower and Brazil will enter recession in the second half of 2020, approaching the level of losses seen in the 2014-2016 period,” the ministry’s economic policy division warned in the report.

It said growth this year would slump to 0.8 percent from 1.3 percent last year — far weaker than the market consensus of around 2.5 percent and much worse than the 2.9 percent “best case” scenario of reform being passed.

Recessionary forces would also deepen over coming years if the pension system stays unchanged, the ministry said. The economy would shrink by 0.5 percent in 2020, by 1.1 percent in 2022 and as much as 1.8 percent in 2023.

It said benchmark interest rates will soar past 11 percent by year end from the current record low of 6.50 percent, and as high as 18.5 percent by 2023. Most economists expect rates to be on hold for the rest of this year.

But if reform is passed, growth will accelerate, job creation will surge and interest rates will fall, the Economy Ministry predicted.

The benchmark Selic rate could be reduced to a new low of 6.0 percent later this year while the economy could create as many as 8 million new jobs by 2023, it said.

Economists have already factored in pension reform into their forecasts and say the outlook is not that strong even if something is approved this year, most likely a diluted version of Bolsonaro’s bill.

Corporate and household balance sheets have not been fully repaired since the 2014-16 recession, the international picture is cloudy, and not everyone is convinced the new administration will deliver on its pledges.


Source: Reuters

Brazil President Jair Bolsonaro’s government on Thursday released the first details of its long-awaited pension reform proposal, cheering investors who want to see the passing of legislation seen as key to shoring up creaky public finances.

Rogerio Marinho, secretary of social security and labor at the economy ministry, told reporters the government’s bill will call for a minimum retirement age of 65 years for men and 62 years for women, and will be put to Congress on Feb. 20.

The transition period for these changes to be fully implemented will be 12 years, he added, after leaving a meeting with Bolsonaro and other cabinet members.

“The president has decided and asked us to divulge only some information, but the content of the text will be ready for Feb. 20,” said Marinho. “The text is ready, it is already circulating in the internal organs of the government, and is just waiting to be validated with regard to its constitutionality.”

The market reacted with delight at the government’s plans, providing a rare bolt of good news for a young, ideologically disparate administration that has become snared in petty infighting and graft scandals in recent weeks.

Brazil’s Bovespa stock market rose 2.05 percent, its best day since Jan. 2, while the real rallied further in unofficial after-hours trading.

Economy Minister Paulo Guedes said last month that total savings could reach 1.3 trillion reais over the next 10 years, and last week he said the aim was to save at least 1 trillion reais in a decade.

Many analysts are skeptical, arguing that savings may ultimately be less than half that 1 trillion reais figure because the government will be forced to water down proposals in order to get them through Congress.

It’s not clear how much the official proposals to be put forward next week will save, but the market reaction suggested traders were happy.

“Finally, something official and reasonably clear,” said Jose Francisco de Lima, chief economist at Banco Fator. “This will reduce uncertainty in a good way. Markets will like it.”

Brazil’s social security deficit was by far the biggest contributor to the government’s overall fiscal shortfall last year, which widened 7 percent to 195.2 billion reais. In nominal terms, the pensions deficit has nearly quadrupled in four years.

To control those runaway costs, most analysts agree the government will have to make unpopular policy changes.


Source: Reuters

On February 4th, in a message to the newly installed Congress, the president, Jair Bolsonaro, added some granularity around his government’s economic policy agenda. Further details have emerged from recent public statements by Paulo Guedes, the economy minister. A proposal for social security reform is likely to be presented to Congress by end‑February for debate, but it will take time before it goes to a final vote, probably in June or July. Other ambitious elements of the economic reform agenda—tax reform and privatisation—are likely to be pushed to late 2019 or early 2020. In the meantime, as the government is likely to prioritise pension reform, it will also pursue political “wins” with more modest measures to improve the business environment.

Following the establishment of an enlarged Ministry of Economy (that subsumes the ministries of finance, planning, and trade and industry) in an attempt to ensure harmonisation of economic policy, Mr Guedes has appointed six special secretaries, all of whom are seen as liberal and advocates of free markets. This has reinforced the expectations of a shift towards greater economic liberalisation and fiscal responsibility. Indeed, Mr Guedes’ ideas are fairly radical for Brazil—and are likely to face obstruction in a fragmented Congress.

Social security reform

With respect to the most important economic policy item—social security reform—the government is unlikely to use the bill put forward by the previous Michel Temer administration (2016‑18) and which made some advances through various congressional commissions in 2017. Although the government’s proposal is expected to be presented to Congress by the end of February, the vote on the bill will not be held for some time, as it will be vetted by various committees in both the Chamber of Deputies (the lower house) and the Senate (the upper house). The final vote on the bill in the Senate will probably be held in June or July. As it will require a constitutional reform, a three‑fifths majority will be needed. This is always a challenge in Brazil, particularly for a politically sensitive reform such as to the pension system.

The proposal that will be presented to Congress is likely to include an increase in the minimum retirement age and the minimum number of years of contribution required to be eligible for a full pension. A leaked draft of the bill indicated that the economic team wanted to set a minimum retirement age of 65 for both men and women, but this is likely to be altered before being presented to Congress, with different (and lower) retirement ages for both women and men. The draft bill also proposes a shorter transition period for the increase in the retirement age than suggested by the previous administration, in order to guarantee immediate fiscal savings. The legislation is likely to propose a gradual implementation of a capitalisation regime, whereby individual accounts of mandatory contributions are retrievable upon retirement, as opposed to the current system in which pensions are funded by a common pool of contributions by current workers. This would probably only apply to new entrants into the labour market, however. Unification of civil servants and private workers is also likely but military pensions will probably be dealt with in a separate bill.

Tax reform

Although, given the urgency, social security reform will be the most closely watched indicator of the government’s ability to get Congress to approve its reform agenda, other structural reforms will be needed to unlock Brazil’s growth potential. Simplifying the country’s highly complex tax system (including federal, state and local taxes) and implementing a common value‑added tax (VAT) across the country, as envisaged by Mr Guedes, will face strong opposition from state governments and regional alliances in Congress, because it means that states will lose the ability to adjust taxes for attracting businesses or balancing their accounts. Mr Guedes may use a reduction in corporate tax rates (from 35% currently to 20%) to leverage support in Congress, but the introduction of taxes on profits and dividends to counterbalance the revenue loss is likely to meet its own opposition.


Mr Bolsonaro has indicated that he would not be willing to fully privatise strategic state‑owned or ‑controlled enterprises including Petrobras (the biggest oil, gas and energy company), Banco do Brasil (the largest retail bank in Brazil) and Caixa (the fourth‑largest retail bank). Nonetheless, we expect some progress on privatisation in the medium to long term, but with a focus on divestment of non‑core businesses, such as insurance, credit cards and lottery for the state‑owned banks, and distribution for Petrobras. The government may use capital markets in this process to reduce its shareholding position through initial public offerings. Accelerating the bidding for infrastructure concessions such as airports and roads is also likely to be quickly achievable and will face little opposition.

Small victories

On the trade liberalisation front, the government may well undertake a number of measures to boost productivity that would not require congressional approval. These include unilaterally reducing trade tariffs (without breaching rules set by Mercosul, the Southern Cone customs union) and reducing Mercosul’s external tariffs to the global average. Turning Mercosul into a free‑trade area rather than an (imperfect) customs union is also on Mr Guedes’s radar, but we do not expect any significant progress on this goal in the short term. In terms of improving the business environment, the government is likely to focus on measures such as improvement of the portal for digital trade, reduction of processes for opening/closing a business and modernisation of existing microcredit programmes (for supporting small to medium‑sized enterprises).

A first political win

The recent election of Bolsonaro’s allies from the Democratas (DEM) party as leaders of both the Chamber of Deputies (Rodrigo Maia) and the Senate (David Alcolumbre) represented a key victory for the government. Mr Maia and Mr Alcolumbre have the keys to set the legislative agenda in Congress, in addition to deciding on significant processes such as parliamentary inquiries (CPIs) that could easily weaken the executive. The composition of parliamentary blocs (formed to act through special committees responsible for overseeing legislative debates on specific issues) will also assist the administration, as it will be able to choose key appointments to oversee many of these commissions.

Although this does not imply that the parliamentary blocs will support every bill proposed by the government, especially as still‑powerful centrist parties are likely to negotiate their support on a case‑by‑case basis, it reflects a fairly strong government position in Congress at the outset at least. Nonetheless, coalition building will be key to securing the support of 308 deputies in the lower house required for approving constitutional amendments (such as social security and tax reform); the government only has the support of an estimated 300 at present. In addition, the government may need the support of other parties to neutralise the threat of opposition from Renan Calheiros, a legislator who withdrew his candidacy from the vote for the Senate presidency at the last minute and who could become a rallying point for the opposition.

Finally, the sequencing of reforms will also be crucial. A victory in social security reform will buy the government time and support, paving the way for later battles such as tax reform and more controversial privatisations, such as the Petrobras distribution business— which are unlikely to be presented to Congress until end‑2019 or early 2020. In the meantime, the government will try to take small steps on the business environment and trade liberalisation fronts, and prioritise infrastructure concessions to boost revenues in the short term. Investors will monitor the progress of pension reform during the months of debate in Congress. There are downside risks for Brazil’s fiscal and economic outlook should there be disappointments in our and the markets’ baseline assumption of sufficient progress in bolstering the public finances.


Source: The Economist

After scaling back its investment banking operations in Brazil, Deutsche Bank is looking to move its fixed-income trading businesses back into the country. With the election of Jair Bolsonaro, the bank is bullish on the economic agenda for Brazil moving forward.

The move would effectively transfer the bank’s fixed-income and currencies trading operations to Sao Paulo from New York City. In an effort to cut costs by eliminating 26,000 jobs in 2016, Deutsche Bank cut down its Brazil team in half as well as other parts of Latin America, including Chile, Peru and Uruguay.

“Our focus now is on revenue, in trying to broaden the scale of our operation here in Brazil and the relevance of our business locally and globally,” said Maite Leite, the Frankfurt-based company’s chief country officer for Brazil.

Leite views Bolsonaro’s administration as one that provides a “more positive environment” in terms of being more business-friendly. The move will also allow Deutsche Bank to provide more exposure to their hedging products with respect to the local currency.

“We now have the ability to offer more sophisticated, flexible hedging products for clients than before,” said Ricardo Cunha, a managing director responsible for the fixed-income and currencies business at Deutsche Bank Brazil.

Late last year, Bolsonaro entrusted Santander executive Roberto Campos to oversee Brazil’s central bank–a move that signals the polarizing Bolsonaro’s seriousness when it comes to fixing the languishing economy.

Bolsonaro, who has publicly admitted that his knowledge of economic policies is practically nil, is assembling a team of top-shelf economists to bring to life his plans to curb spending, while at the same time, divest the government from state-run companies and simplify the tax system. Campos, the treasury director at Banco Santander Brasil, brings to the table hands-on trading desk experience–the type of risk-reward analysis that could benefit the country’s economic policies moving forward.

The election of the polarizing Bolsonaro was the message Brazilian voters communicated to the world that anti-establishment was in and traditional politics was out. However, now the real work begins for Bolsonaro’s presidency.

Bolsonaro is inheriting a bevy of problems he must address during the course of his presidency and the faith of Brazil’s populace will hinge upon his success. Of course, Bolsonario’s biggest task is to help extract the country from its current economic doldrums, but his election is perceived by market experts as one that leans toward the benefit of the country’s capital markets and the latest appointment of Campos to head the central bank alludes to such.

This bodes well for Brazilians as the economy will be first and foremost on their minds since the country has been slow to recover after it experienced its worst recession to date. Unemployment levels remain high with double-digit figures and the country is drowning in public debt–74% of Brazil’s GDP.

While the annual GDP growth has posted positive gains as of late, it’s still not at a level where economists are optimistic about the future growth prospects. Prior to the election, the ideal situation to address Brazil’s current financial woes was to elect a president who is market-friendly to help stymie the issues by effecting policies that favor economic expansion and growth–now, they potentially have that in Bolsonaro.



Brazilian financial markets’ and the central bank’s views on interest rates are beginning to converge: Rates will likely remain at record lows all year, with social security reform being the biggest single risk to a move in either direction.

The central bank’s statement accompanying the unanimous decision on Wednesday to keep rates on hold at 6.50 percent struck a cautious tone. Although the “asymmetry” of risks still points to an eventual rise, the tightening bias is softening.

Interest rate traders have been far more dovish and still see no change this year, but they softened their easing bias on Thursday. January 2020 futures contracts nudged up to 6.50 percent, wiping out the 15 basis-point easing they had implied all week in the biggest one-day rise since October.

Meanwhile, some of the reform-fueled optimism that lifted the Brazilian real to a three-month high last week also weakened on Thursday. The currency fell for a fifth straight day, and was on course for its worst week since November.

None of these moves alone are particularly big, but together they reflect a pause in Brazil’s market rally, serve as a reminder that pension reform will be fraught and are a nod to the central bank’s reluctance to rock the boat, said analysts.

“The central bank and markets appear to be converging, but this will depend on whether pension reform is approved,” said Julio Hegedus Netto, chief economist at Lopes Filho & Associados.

“If it isn’t, we could well have a reversal,” he said.

The size, shape and scope of the government’s plan to overhaul Brazil’s social security system, which Economy Minister Paulo Guedes said could save the state around 1 trillion reais ($270 billion) in a decade, is still to be determined.

Guedes said on Thursday that various options will be put to President Jair Bolsonaro as soon as he recovers from surgery he had last week. Guedes said the measures they are examining will form a comprehensive package.

The newly elected speaker of the lower house, Rodrigo Maia, said this week that pension reform will be the first item on Brazil’s legislative agenda and could be approved in both chambers by July.

That is later than some traders had hoped for, contributing to the reversal in Brazilian rates and currency markets on Thursday and bringing traders and the central bank that little bit closer together.


Source: Reuters