According to analysts at Rabobank, the rally in Brazilian assets took another breather last week, as the (not necessarily new) political hurdles to pass an effective pension reform created an opportunity for some profit taking and a tactically defensive approach.
Key Quotes
“The BRL underperformed most peers (except for the ARS), sliding 1.2% for the week, closing at 3.75/USD. In fixed income, nominal yields bear-steepened (up 8-18bps for liquid tenors).”
“The movements in Brazilian asset prices contrasts with positive news on the realm of reforms. On Wednesday, President Bolsonaro went to Congress to submit the government’s pension reform proposal (see here the official presentation in Portuguese). At the occasion, he made an emphatic speech on the necessity to pass this key reform.”
“The (very detailed) proposal is tackles distortions (e.g. minimum age of retirement, asymmetric rules across regimes) with reasonable transitioning periods and rules. The expected savings stand around BRL 1.1 trillion in 10 years, more than twice as large as the savings generated by the previous bill (which has been abandoned). Therefore, even if slightly diluted in Congress at the end, this constitutional amendment (alongside other sub-constitutional measures, such as a new minimum wage rule) can effectively guarantee the implementation of the spending cap and the stabilization of government debt in the medium term.”
“Clearly, the market focus turns back (once again) to the political arena, since the government will need strong efforts in terms of political coordination to soften the early signs of resistance to this (politically controversial but economically indispensable) reform.”
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