JPMorgan Says Brazil's Real Pension Boost Limited by Weak Growth

Aline Oyamada
JPMorgan Says Brazil's Real Pension Boost Limited by Weak Growth

(Bloomberg) -- Brazil’s push to overhaul its bloated pension system, seen as key to restoring investor confidence in the nation, threatens to drag down the real as political wrangling proves far more difficult than expected, according to the currency’s top forecaster.

Cassiana Fernandez, JPMorgan Chase & Co.’s chief Brazil economist, sees the real at 3.90 per U.S. dollar by year’s end, more pessimistic than the 3.75 per dollar median forecast. That’s partially because she’s more downbeat than the market on growth, expecting the economy to expand just 1.5 percent this year, a far cry from her initial forecast of 2.3 percent.

“The political uncertainty already began to impact market expectations,” Sao Paulo-based Fernandez said in an interview. “What we expected to be one of the biggest drivers for growth this year, which was an improvement in confidence levels due to the government’s more liberal agenda, will actually be weaker and take longer to materialize.”

The recent pessimism stands in stark contrast to the giddiness seen during President Jair Bolsonaro’s election in October. Investors shrugged off concern Bolsonaro, who comes from a small party, would have trouble finding support in a fragmented Congress to overhaul the social security system and generate savings of 1.16 trillion reais ($295 billion) over 10 years.

Yet each lurch forward or back in the flagship measure has driven Brazilian assets this year, lifting them on signs of progress and sending them down on perceived setbacks.

“Markets have no doubts about the quality of the economic team and its agenda,” Fernandez said. “The biggest doubt has always been about the government’s political ability to implement that agenda. A social security overhaul is challenging in any country and Brazil’s political conditions only make it harder.”

After weeks of interrupted sessions, shouting matches and debates on changes to the text, lawmakers in the lower house’s Constitution and Justice Committee agreed late Tuesday that the bill can proceed in Congress.

The so-called CCJ was seen as the easiest step the reform had to clear -- former President Michel Temer’s proposal, in comparison, took less than 10 days to pass that stage. Now, months of debate and no fewer than six votes in both houses of Congress lie ahead before it can become law.

Over the next few months, negotiations at the special committee -- the next one analyzing the bill -- will be eyed for an idea of which specific points legislators will try to alter and how much that will dilute the reform’s fiscal impact, according to Fernandez. She expects the overhaul to be approved in the last quarter of the year, with the first floor vote in the lower house at the end of the third quarter. Negotiations with lawmakers will likely cut the planned savings in half, she said, adding up to around 700 billion reais once the impact of the reform in states and municipalities is factored in.

Fernandez, who was the most accurate forecaster for the real in the first quarter of this year according to Bloomberg rankings, says the currency could strengthen in the short term to 3.80 per dollar in the second and third quarters as concerns about a U.S. recession ease and as China growth surprises to the upside.

But the fate of the overhaul, and its impact on growth expectations, remains the most important driver for the Brazilian real, according her. With a still fragile support base and frequent infighting, the government will have to improve its relationship with lawmakers, she said. Bolsonaro was elected with a pledge to put an end to “old politics,” refusing to exchange government posts for support, a phrase he has frequently repeated since taking office.

“Knowing that the government is not willing to negotiate with the Congress is always a bad scenario,” she said. “There are various ways to negotiate, not necessarily handing over roles. What is important for markets is to know that the government is willing to make negotiate.”

To contact the reporter on this story: Aline Oyamada in Sao Paulo at

To contact the editors responsible for this story: Julia Leite at, Alec D.B. McCabe

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