Brazil approves pension reform

After the House of Representatives had already passed the legislative package at the beginning of August, the second chamber of parliament, the Senate, has now also approved the project. Votes are still pending on two annexes that could dilute the package. Nevertheless, the prospects for an unchanged reform package appear good.

The reform raises the retirement age and regulates pension contributions. Over the next ten years, the budget is to be relieved by a total of BRL 800 billion. As is customary with pension reforms, the majority of savings will only become effective in the long term. Market observers and rating agencies welcome the reform. The emerging approval had already led to a positive reaction in the last few days. The stock market was in a record mood and the risk premiums on Brazilian bonds shrank. The real was also firmer this week. There is therefore little to be said against further interest rate cuts by the central bank.

The hopes that the adoption of the reform will lead to a change in sentiment and that investment activity will also pick up significantly are likely to be somewhat exaggerated, but this is nevertheless a sign of the country’s ability to reform. The military, the federal states and the municipalities have so far not been included in the regulations, so that larger parts of the public sector still need to be regulated in the future.

After the reform of the old-age pension system, other important packages are already on the agenda of the government and parliament. Above all, the fragmented tax system needs to be revised. In addition, parliamentary discussions have been underway for some time on anchoring the independence of the central bank more firmly. There are good prospects that progress will also be made in these policy areas, even if the legislative process could be very tough. The fundamentally positive sentiment towards the Brazilian market and the real is likely to continue.

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