Pension reform: is this it?

. Oct 22, 2019
Pension reform: is this it? Photo: Marcos Oliveira

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Good morning! We’re covering today’s upcoming pension reform vote (and what comes next). The Brazilian stock market reaches a record high. And, the OECD’s worries about Brazil’s anti-corruption efforts. (This newsletter is for platinum subscribers only. Become one now!)

Pension reform: is this it?

Today, the Senate is expected to

finally approve an overhaul to Brazil&#8217;s pension system—finishing an eight-month-long legislative process. As with all proposals to change the constitution, the reform needs to be approved by two-thirds of each congressional house in two rounds of votes. The whip count in the Senate is highly favorable to the proposal.</p> <p><strong>Why it matters.</strong> The pension reform is a core point in the agenda of Economy Minister Paulo Guedes. It is also one of his most controversial proposals. When the reform passes, the government will be able to move on to other proposals that won&#8217;t stir up as much heated debate as retirement pensions.</p> <p><strong>Glass half full? </strong>The reform will allow for over BRL 800 billion in savings for the government over the next ten years. Moreover, it is a signal to investors that Brazil is committed to more austerity. But since being presented, the bill has been significantly altered—many of the privileges it was set to curb (such as advantageous military pensions) have remained.</p> <p><strong>What&#8217;s next?</strong> With October coming to an end, the government might not be capable of approving any other significant economic proposal before 2020. Here&#8217;s what you should keep an eye on:</p> <p><strong>Pension Reform II.</strong> To allow the pension reform to move faster, senators restrained themselves from changing the text voted on by the House. Instead, they will propose a separate bill with further amendments to the system.</p> <p><strong>Budget reform.</strong> Economy Minister Paulo Guedes wants to end how the budget is structured—with 94 percent of it being determined by law, which gives administrations too little room to establish priorities. However, the idea is to slash spending on education and healthcare, as well as allowing pension cuts—which is highly controversial.</p> <p><strong>Tax reform.</strong> The government has yet to decide which tax reform proposal it will sponsor. There are currently two bills pending in Congress, both aimed at unifying several federal- and state-level taxes.</p> <p><strong>Administrative reform.</strong> The government—as well as congressional leaders—want to curb some of the perks enjoyed by civil servants, such as their near-impossibility of being fired and disproportionately high wages (96 percent higher than the average of private workers&#8217; salaries).&nbsp;</p> <p><strong>Federative pact.</strong> The Economy Ministry wants to redefine the roles of federal-, state-, and municipal-level administrations. That would also alter how tax revenue is split between these spheres of government, which could attract support from governors and local politicians. But it is unlikely to pass in 2020, an electoral year.</p> <hr class="wp-block-separator"/> <h2>Brazilian stock market index at a record-high</h2> <p>Excited about the prospects of the pension reform (and fueled by a positive wave in foreign markets) investors drove the Ibovespa—the benchmark index of the São Paulo stock exchange—to a new record high of 106,022 points (+1.23 percent).</p> <div class="flourish-embed" data-src="visualisation/529619"></div><script src=""></script> <p><strong>Why it matters.</strong> Despite the still-sluggish economy, many analysts see a silver lining in the near future—with interest levels at historic lows and the government committed to avoiding the ballooning of public expenses.</p> <p>The Focus Report, a weekly survey by the Central Bank with top-rated investment firms, shows growing optimism—after seven weeks stable at 0.87 percent, markets elevated their GDP growth forecast to 0.88 percent.</p> <p><strong>Glass half empty.</strong> While the Ibovespa has risen consistently as the pension reform drama approaches an end, the low financial turnover registered over the past few trading sessions is noteworthy. Only BRL 9.5 billion were traded yesterday—way below the daily average for the year of BRL 12.3 billion.</p> <p><strong>Warning signs?</strong> A recent study by consultancy Alvarez &amp; Marsal analyzed the balances of 374 companies listed in Brazil, ranking them according to 20 metrics (such as return on investment, valuation, or profitability). They found 25 percent of them were &#8220;vulnerable&#8221; and 20 percent were &#8220;extremely vulnerable.&#8221; According to Kevin Munier, a senior director at Alvarez &amp; Marsal, many companies used the [2014-2016 recession] as a smokescreen to hide deep management and governance issues.</p> <p><strong>Bubble.</strong> David Levy, chairman of the Jerome Levy Forecasting Center, told <a href=""><em>Bloomberg</em></a><em> </em>that the hunt for high returns (as well as rising debt levels) is creating an &#8220;asset bubble [in] the emerging-market sector.&#8221;</p> <hr class="wp-block-separator"/> <h2>OECD warns Brazil might not keep up anti-corruption efforts</h2> <p>The Working Group on Bribery at the Organization for Economic Co-operation and Development (OECD) is sending a mission to Brazil as early as November, to &#8220;reinforce the message that law enforcement&#8217;s capacity to investigate and prosecute foreign bribery should be preserved.&#8221;&nbsp;</p> <p><strong>Why it matters.</strong> Under the OECD Anti-Bribery Convention, Brazil is committed to cracking down on <a href="">corruption</a>. But recent moves by lawmakers—as well as the Supreme Court—have raised red flags. And not only in Brazil, it seems.</p> <p><strong>Anti-anti-corruption? </strong>The OECD showed particular concern with the &#8220;Abuse of Office Act,&#8221; aimed at curbing excesses from law enforcement but seen by many organizations as a way lawmakers can keep prosecutors in check.&nbsp;</p> <p>Also, a July ruling by Supreme Court Chief Justice Dias Toffoli suspended all investigations using financial information from Brazil&#8217;s money laundering enforcement agency without a court order. International practices dictate that date from these agencies precede judicial measures—as they are used to back investigation requests.</p> <p>&#8220;The attempts to restrict tax authorities’ capacity to detect, report, and investigate foreign bribery and money laundering are among the preoccupying measures and decisions that will continue to be closely monitored,&#8221; says the OECD.</p> <hr class="wp-block-separator"/> <h2>What else you need to know</h2> <p><strong>House.</strong> In a plot filled with twists and turns, allies of President Bolsonaro managed to finally oust Congressman Delegado Waldir from the position of party whip in the lower house—replacing him with Eduardo Bolsonaro, the president&#8217;s son. The move exposes internal fractures within the Social Liberal Party, with several actors making public threats to expose each other&#8217;s hidden skeletons. Eduardo Bolsonaro&#8217;s first move as whip was to fire all 12 deputy whips—including his allies. &#8220;Good shall prevail over evil,&#8221; said President Bolsonaro about the dispute.</p> <p><strong>Embassy. </strong>Following the battle in the House, President Jair Bolsonaro suggested his son should give up on being named ambassador to the U.S. and stick to his responsibilities as party leader. If that is the case, diplomat Nestor Foster is likely to be named ambassador to Washington D.C. (a position he currently holds on an interim basis). Mr. Bolsonaro also said he will pick a new ambassador to Israel.</p> <p><strong>Millionaires.</strong> Over the past year, the number of Brazilian millionaires went up by 19 percent to 259,000 individuals. Credit Suisse&#8217;s Global Wealth Report also estimates that Brazil&#8217;s top 1 percent detains half of the country&#8217;s family wealth—which amounts to around USD 3.5 trillion. Brazil&#8217;s &#8220;ultra-rich&#8221; club (those with a net worth of at least USD 50 million) became 860 people larger in 2019, growth only beaten by their counterparts in the U.S.</p> <p><strong>Embraer.</strong> Brazilian planemaker Embraer signed a USD. 1.4 billion deal to provide a fleet of executive jets to Flexjet (an American provider of fractional ownership aircraft, leasing and jet card services). Flexjet will be the first customer of Praetor models, which have recently been approved by air travel regulators in Brazil, Europe, and the U.S.</p> <p><strong>Violence.</strong> Brazil observed a 22-percent reduction in violent deaths over the first eight months of the year (when compared to the same period in 2018). The numbers, however, have little to do with the federal government—and the results must be more attributed to state administrations (which have learned more about how to deal with criminal gangs) and with accommodations in rivalries between cartels.

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