Paradoxes
For Brazil to grow sustainably, many reforms are necessary, not only to assure a solid fiscal adjustment – as is the case of the pension reform – but also to stimulate investments and boost labor productivity. The task is daunting and will take years. The current government has taken some important steps, such as the spending cap, labor law reform and change in the system for charging interest by the BNDES, but efforts are stalled now, in particular the pension reform. Temer spent most (if not all) of his political capital to remain in office. However, despite all the extremely costly bargains from a fiscal standpoint, he has failed miserably to obtain a floor vote this year on the pension reform proposal (in its less ambitious version). He has missed the window of opportunity in 2017, and worse still, approval in 2018 is highly uncertain due to the run-up to the elections. The benefits (if they occur) have been postponed, but the costs have already become consolidated, in the form of tax breaks and debt pardons, which will cost the public coffers dearly for the next decade. Compliance with the spending ceiling is looking increasingly difficult over the long run, and even in the short term the fiscal problem has been aggravated by the failure to win approval of the laws necessary to meet the primary result target in 2018. In short, the economic perspectives for next year have clearly worsened, but despite this deterioration, no significant reflections have occurred in asset prices. Instead of “chasing mirages” and being deluded with the behavior of asset prices, it’s better to be concerned with the economy as a whole. Indeed, in the final analysis that’s what matters.
Now read on...
Register to sample a report