Date first published: 27/02/2018

Key sectors: all
Key risks: governability; delays to fiscal reform agenda; policy uncertainty

All eyes in Brazil are on the 7 October general election. The indefinite postponement of the congressional vote on the government-backed pension reform is a testament to the prominent role that the electoral campaign already has in all matters in Brazil. Although the decision to shelve the vote was formally taken because no constitutional amendment can be voted on while there is an ongoing federal military intervention in a state – as is the case in Rio de Janeiro – the postponement is instead likely due to insufficient support for an unpopular reform to which lawmakers seeking re-election would not like to be associated with. President Michel Temer’s administration sent its first pension reform proposal to Congress in December 2016 and has since then repeatedly postponed votes and significantly watered down the original version to secure congressional approval. Corruption scandals, a lack of popularity and the imminence of the electoral cycle ended up turning Temer’s flagship fiscal austerity measure into the incoming president’s first big challenge.

Pension reform was portrayed by Temer’s administration as the key fiscal austerity measure to shore up the budget. The lack of a strong popular mandate, with approval ratings currently at 6 per cent, and the unpopularity of the reform itself further complicated the task of luring congressional support to approve at least a portion of what was originally proposed. Temer’s own personal battle against several corruption charges further delayed the legislative agenda – as Congress got busy deciding whether he should face a Supreme Court trial. Temer managed to secure his own political survival, but ran out of leverage to overhaul Brazil’s costly pension system. The consequences of this defeat might not be immediately felt, particularly as Brazilians’ focus on deciding who will be running Latin America’s largest economy starting in January 2019. One thing has become certain: with no pension reform in place, whoever wins the presidency will have little-to-no choice but to tackle the issue in the early days of the four-year term for Brazil’s economic recovery to continue.

Unprecedented levels of uncertainty surrounding the election make it difficult to assess whether pension reform will be a priority for the incoming administration. Given the need to consolidate Brazil’s economic recovery despite heightened political risk, it should. The current system demands a third of federal spending before interest payment, accounting for 9.1 per cent of GDP. Reforms could significantly help consolidate public finances, which posted a fiscal deficit of 8 per cent in 2017. According to the World Bank, without such reforms the current system could consume the entire federal budget by 2030. This is far from worrying voters, with only 14 per cent backing the government’s plan according to a recent poll. Short term concerns have, once again, pushed a pressing issue further down the line.

Despite relatively positive economic forecasts, political risks may continue to affect Brazil’s creditworthiness. On 23 February Fitch Ratings cut Brazil’s rating by one notch to ‘BB-’, four days after the suspension of the vote on the pension reform. S&P had already done so in January, citing ‘slower than expected progress’ in passing reforms and uncertainty regarding October’s elections. Securing the tools to avoid a relapse into crisis will very much depend on the election result, likely the most important and complex since Brazil’s return to democracy in 1985.