Brazil Bovespa hits all-time high after pension reform approval
Market welcomes long-delayed pension reform that includes raising the minimum retirement age and increasing workers’ pension contributions
Brazilia — Brazil stocks scaled new highs and the currency posted modest gains on Wednesday after the senate approved a crucial pension reform bill.
Brazil's senate approved the main text of the government’s landmark pension reform proposal late on Tuesday.
Once voting to approve the last four amendments concludes on Wednesday, the bill will be cleared to be signed into law by Brazilian President Jair Bolsonaro.
The reform is seen by the government and many economists as crucial to stabilising Brazil's public finances and restoring business confidence, conditions they say will lead to stronger and more sustainable growth in Latin America's largest economy.
Pension reform has dogged successive governments over the past three decades and been at the centre of congressional debate for three years running, while the social security deficit has steadily risen.
The bill passed by the senate aims to save the treasury about 800-billion reals ($195bn) over the next decade through measures that include raising the minimum retirement age and increasing workers’ pension contributions.
Economists have said controversial cuts to social security spending are also crucial to closing a fiscal deficit that cost Brazil its investment-grade credit rating.
The economy is on track to grow by less than 1% in 2019, lower than the previous two years and well below the 2% or more most economists and the government expected at the start of the year.
“Congratulations Brazilian people! This victory, which paves the way for our country to finally take off, is yours! Brazil is ours! GREAT DAY!” Bolsonaro tweeted on Tuesday from Asia, where he is making a series of official visits.
In anticipation of the full approval on Wednesday, bulls took the country's benchmark Bovespa stock index to an all-time high late on Tuesday and the currency strengthened more than 1% against the dollar. On Wednesday both gained about 0.4%.
But Elisabeth Andreae, EM analyst at Commerzbank, warned that there is limited appreciation potential for the currency ahead as there are other urgently needed reforms and markets are a bit sceptical about their passage as they may face strong resistance.
In Chile, the peso lost 0.4%, while stocks shed 0.7%, ahead of a central bank meeting as the country braces for more protests and a general strike by state workers on Wednesday.
President Sebastian Pinera's announcement of ambitious reforms failed to quell unrest that has rocked the country and led to at least 15 deaths. Protests against high cost of living were sparked by a recent hike in public transportation and have been ongoing since the weekend.
Analysts say the protests have raised the possibility of a sharper 50 basis point (bp) cut. “Recent domestic events should support (the central bank’s) easing bias,” analysts at Morgan Stanley said in a note. “While we think that a 50bp cut is possible in today’s decision, we don’t see it as the base case and think that the governing board would prefer to leave the door wide open for further cuts.”
The bank had slashed the interest rate by 50 bps in September.