LCA Weekly Macro View: Brazil: Fiscal adjustments will weigh on aggregate demand for some years

LCA Weekly Macro View: Brazil: Fiscal adjustments will weigh on aggregate demand for some years

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Chamber Member News Post Date: 12/20/17 Source: LCA Consultores By: LCA Consultores
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Summary

Negotiations on pension reform have stalled, since the government hasn’t guaranteed sufficient support to approve the matter in Congress this year. A new round of negotiations will be opened after the holiday season and the government expects to pass the pension reform by the end of February’2018. But markets are skeptical.

The frustration regarding pension reform has, yet, not weighed on the sovereign risk assessment. Two main factors can explain the relative stability of the Brazilian Credit Default Swap (CDS):

(1) the favorable external environment, enhanced by a synchronized pick-up in the main global economies and a faster world trade growth; and

(2) the confidence that Brazilian markets are placing on the assumption that the pension reform (and other fiscal ad-justments) will be resumed after the October’2018 elections.

In this context, markets are expecting the rating agencies to remain on hold. Should the Brazilian credit rating be main-tained, even in the case that the outlook is put under a negative perspective, the impact on the Brazilian Real (BRL) is expected to remain limited.

It is worth noting, however, that a favorable outcome for the elections - i.e. the victory of a candidate committed to fiscal reforms - is not a guarantee that the threat of a credit rating downgrade will be automatically "disarmed" by the rating agencies.

This because, given the current trend of growth in the number of social security benefits, among other factors, it is very likely that the federal government will find it difficult to comply with the public spending ceiling rule in 2019 and 2020. Read Full Article