Brazil Survey
What will be the impact of the pension reform?
Pension reform was approved last October, and includes
measures such as raising the retirement age and increased
workers’ pension contributions in a bid to save close to USD 200
billion over the next decade. The reform has undoubtedly provided
a short-term boost to confidence, and raised expectations for
progress on other reform fronts going forward. Moreover, the
measures are an important step towards strengthening the
public finances. However, the majority of panelists polled by
FocusEconomics believe that the pension reform alone would
not be enough to stabilize the public debt-to-GDP ratio—which,
at close to 80%, is extremely high by emerging-market standards.
The LatinFocus Consensus Forecast sees the public debt-toGDP ratio peaking in 2021 and declining marginally thereafter,
suggesting panelists see further measures going forward to
improve the fiscal outlook.
“The approval of pension reform was essential to avoid the
unsustainable rising trend of public debt. However, it is not
enough to stabilize the public debt in the medium to long-run.”
Mauricio Nakahodo, economist at Banco MUFG Brasil S.A.
“Other measures are necessary to reduce the ratio.”
Fernando Honorato Barbosa, chief economist at Banco
Bradesco
“[…] interest rate cuts were decisive to significantly improve
the outlook for the public debt-to-GDP ratio as much as recent
[political] developments were.”
José Francisco Lima Gonçalves, chief economist at Banco
Fator
“The spending cap and the pension reform were the most
important reforms [to reduce the debt burden]. The others are
auxiliary, but not as fundamental as those were.”
Sergio Vale, chief economist at MB Associados
Which further steps would reduce public debt?
Panelists frequently mentioned that fiscal and administrative
reforms—particularly to address high mandatory expenditure—
were key in order to complement the pension reform and put the
public debt-to-GDP ratio on a firm downward path. In this regard,
the fate of a package of measures presented to Congress in
November—which includes the creation of a fiscal council, a
fiscal emergency amendment enabling austerity measures, and
changes to public-sector pay and conditions—will be important to
watch. Most panelists do not see the package being implemented
in full, however.
“Brazil has roughly 90% of mandatory expenses in its annual
budget, so the spending cap has been a burden on discretionary
expenditure since 2017, especially public investment. To
reduce the public debt/gdp more reforms targetting mandatory
expenditure are required, such as: administrative reform and
the fiscal emergency reform. The latter also include several
measures to states and municipalities, that are also in fiscal
difficulties.”
Fernando Honorato Barbosa, chief economist at Banco
Bradesco
“Undoubtedly, administrative reform, which aims to reduce and
control mandatory spending, is the biggest challenge and has
the greatest weight on public accounts. In addition, tax reform
would be of paramount importance to simplify the revenue side
and improve the business environment.”
Tarciso Gouveia, head of macroeconomic research at Petros.
What is the outlook for the reform agenda?
Panelists unanimously agreed that there will be some further
progress on the government’s reform agenda, with tax reform
the area mentioned most often by panelists. However, panelists
were also clear that there were unlikely to be sweeping changes
to the tax system, but rather more moderate tweaks, such as
unifying federal taxes. Administrative reform to reduce the public
wage burden was also mentioned frequently. However, this could
be politically contentious, as demonstrated by the government’s
decision to delay such a reform late last year for fear of public
unrest.
“A modest tax reform that focuses on simplification of some
revenue streams appears possible, given strong support from
Congressional leaders.”
Jeffrey Lamoureux, head of country risk for the Americas at
Fitch Solutions
“The agenda is very complicated, but at least the value added tax
should be somehow created.”
José Francisco Lima Gonçalves, chief economist at Banco
Fator.
“Both administrative and the fiscal emergency reforms have a
significant approval probability, with some adjustments to the
content – but should still have a positive effect on spending
reduction over the next 10 years. We think a deep tax reform
is unlikely, but the unification of federal taxes has significant
probability of approval. Central Bank autonomy has a high
probability of approval this year, as well as some privatizations.”
Fernando Honorato Barbosa, chief economist at Banco
Bradesco
“In the case of administrative reform, it is more likely to be
approved some reform focused on new public servants. And
we expect a minor version of tax reform concentrated on the
unification of a few federal taxes and some harmonization on the
rates, and some changes to income tax.”
Mauricio Nakahodo, economist at Banco MUFG Brasil S.A.
How will the 2020 budget impact the economy?
In December, Congress approved the 2020 budget. The
government assumes GDP growth of 2.3% and inflation of
3.5%—both figures which are slightly above our panelists’
forecasts—and sets a primary deficit target of 1.6%. The panel
had mixed views on the economic impact of the budget, ranging
from contractionary to broadly neutral.
“The 2020 budget is less restrictive than the previous years.
The expenses are still restricted by the spending cap, but the
restriction is smaller in the margin.”
Fernando Honorato Barbosa, chief economist at Banco
Bradesco
“2020 will be another year of budget constraint due to the need
for fiscal adjustment. This is a year of local elections and we
might see some higher expenditures during the first half, but as
compared to past election years, the situation is also tough at
regional level meaning moderate expenditures.”
Mauricio Nakahodo, economist at Banco MUFG Brasil S.A.
“As we have been seeing lately, it will be a drag for economic
growth”. Flávio Serrano, chief economist at Haitong
“The public budget, while conservative, should make room for
investment resources as fiscal dynamics improve, particularly
with regard to the primary surplus that is expected to be much
better in 2020.”
Tarciso Gouveia, head of macroeconomic research at Petros
“Moderate fiscal consolidation will be somewhat of a drag on
aggregate demand. On the other hand, fiscal consolidation can
be a positive driver for private confidence and, thus, investments.
All in all, the effect should be roughly neutral.”
Luis Suzigan, senior economist at LCA Consultores.
Will Brazil receive a rating upgrade this year?
Virtually all panelists expect Brazil to receive a credit rating
upgrade this year in response to the improved fiscal and
growth outlook. While some panelists see positive economic
repercussions from an upgrade, others see no significant
change, and some pointed out that the credit rating will remain
below investment grade—an important threshold for decisively
boosting capital inflows.
“We should witness portfolio capital flows and a strengthening of
the real (R$) in the short term.”
Tarciso Gouveia, head of macroeconomic research at Petros
“We think the BRL would strengthen against the USD [in the case
of a rating upgrade], helping maintain the inflation rate at a low
level, even under a solid rebound of economic activity.”
Helcio Takeda, head of research at Pezco Economics
“Very little [impact] – already priced into bond markets.”
William Jackson, chief emerging markets economist at
Capital Economics
“Somewhat limited [impact], there’s a lot of uncertainty in the
political and economic areas.”
César Carrasquero, executive director of treasury & finance
at Banesco
“It will be positive, but not as positive as gaining back the
investment grade, which we consider may happen only after
2022.”
Sergio Vale, chief economist at MB Associados.
How will the stock market evolve in 2020?
In 2019, the Brazilian stock market reached an all-time high on
investor optimism over economic reforms and lower interest
rates. For 2020 panelists are broadly optimistic on the outlook for
Brazilian stocks, with most seeing further price gains.
“According to our scenario, we expect at least 16% [gains].
Alongside our macroeconomic scenario, there is still plenty
of room for advancing multiples of companies. In addition, we
should watch a new round of IPOs throughout 2020.”
Tarciso Gouveia, head of macroeconomic research at Petros
“[Stock prices should rise] linked to our expectation of more solid
GDP growth this and next year.”
Mauricio Nakahodo, economist at Banco MUFG Brasil S.A.
“Most fundamental drivers of stock prices are already counted
in. The low interest rates, less weak economic activity. Further
relevant gains depend on inflows of capital. I don’t expect too
much of this.”
José Francisco Lima Gonçalves, chief economist at Banco
Fator.
Focus Economics
Focus Economics
