Brazil must past social security reform in order to really get the economy humming again, says Helio Magalhães, president of Citibank Brasil in an article published by Agencia Estado news wire over the weekend. Once that hot button issue is out of the way, corporate investors will return to Brazil, “I have no doubt about it,” he was quoted saying.
Late last year, the Brazilian government passed a constitutional amendment capping public spending. The kicker behind that law is that its success is tied to reform of Brazil’s public pension system, a system which favors military retirees and their families, along with wealthy public servants who have made passing changes to Brazil’s public pension plans a toxic no-go zone for politicians.
“I think something will get done on pension reform, but I don’t think it will be all that exciting,” says Luis Assis, director of Banco Fator’s insurance unit in Sao Paulo. Assis thinks that the retirement age will change. For some public employees, retirement age is based on years served, meaning a teacher at a public university may be able to retire in her 50s, somewhat similar to the U.S. system.
Magalhaes thinks American portfolio managers are keen on hoping that Brazil signs some sort of pension law this year. The fragile government of Michel Temer, vice president of the impeached Dilma Rousseff, has a short window of opportunity here. Next year is an election year and congress will be in full campaign mode. Pension reform could be seen as a career killer for some.
“Investors are observing the discussion around pension reform,” the Citi Brasil executive said. “They are talking with us and trying to understand our thoughts on what’s happening, but I would say that pension reform is the most important topic for them because they understand the fiscal problems associated with it,” he said. For instance, if there is no pension reform, there is no spending cap, making last year’s amendment useless. “I think there is optimism (regarding Brazil), but there is no confidence. The difference is that when there is confidence, investors sign checks, make investments, and put money to work to get projects going.”