Brazil: Economy on the Mend

Brazil is recovering from its deep recession as economic reform moves on in congress, with a pension overhaul likely to be approved in the first half of the year, Finance Minister Henrique Meirelles said.

He expressed confidence congress will amend the constitution in the next few months to change retirement rules mostly in line with the government’s original proposal, leading to substantial reduction in government expenditures, Dow Jones reported.

He said that even after lawmakers softened some of the provisions in the bill sent to congress in December by President Michel Temer, what is left would still generate fiscal savings of about 70% of what the government suggested, if approved.

“It is within our range of expectation,” he said, adding that a more severe setback on pension reform would force the government to offset potential fiscal losses with still-undecided new measures. “If it goes lower than 60% then we have to compensate...The present rate of government expenses growth can’t be sustained,” he said.

The pension reform bill is likely to have its first vote at a special committee next week, going to the full Lower House later in May or June, Meirelles said.

The bill aims to close loopholes that for decades have allowed Brazilians to retire in their mid-50s with pensions as high as their latest salary, a situation that caused social-security costs to eat up about half of the nation’s budget. The problem became more acute in the past three years, as the economy took a nose dive.

Brazil’s output shrank 3.6% last year, following a 3.8% contraction in 2015, and is forecast to expand less than 0.5% in 2017. Meirelles said there are signs that a recovery is already under way.

“We are in a robust growth trend,” he said, adding that eliminating statistical carry-over, the government projects that at the fourth quarter of this year output will be 2.7% larger than a year earlier.

Growth could be helped by lower borrowing costs. Meirelles said, adding that with inflation already at the 4.5% target, there is room to keep reducing the benchmark Selic rate, which is now at 11.25%.

Economists surveyed by the central bank last week forecast the Selic at 8.5% by year-end.

The minister said the economic improvement is due, in great part, to last year’s congressional approval of a bill prohibiting public spending to have any above-inflation growth for at least the next 10 years, a measure meant to tame a ballooning debt load that has cost Brazil its coveted investment grade.

Meirelles is meeting with investors in the US and said the fiscal measures are a key part of his pitch to attract foreign capital. “The budget is under control,” he said.