The government sparring before the pension reform

This issue: The most important facts of the week. The pension reform whip list. How Brazilian markets performed. Brazil’s debt ceiling and possible government shutdown. (This newsletter is for platinum and gold subscribers only. Become one now!)

The week in review

GDP. On Thursday, the government released the Q1 2019 GDP figures, showing a 0.2% retraction. The Brazilian economy has reached a point where the pension reform alone will no longer be enough to push through a recovery. Brazil needs an agenda that creates investments—especially in infrastructure. But for that to happen, the government would need to invest time and effort into building a clear set of rules to offer companies regulatory stability and legal certainty—which experts complain is not happening.

Stimulus. After Brazil’s lackluster GDP figures, the government is preparing a stimulus package: allowing workers to withdraw money from their severance fund. If Congress approves the move without too many delays, it could inject roughly BRL 20bn (according to the most realistic estimates) into the economy by Christmas.

Pension reform. The Special House Committee analyzing the pension reform has received 277 amendment proposals from congressmen—70% more than the failed reform proposed by former President Michel Temer in 2017. Most of them concern diluting rules for police and teachers’ pensions. First Lady Michelle Bolsonaro—who has experience working with people with disabilities—asked her husband to remove rules that could reduce their social security benefits. Jair Bolsonaro told his aides to make the change—as the demand was “impossible to refuse.”

Supreme Court. After the Supreme Court reached a majority to criminalize homophobia (even though the trial remains unfinished), President Jair Bolsonaro talked about naming an evangelical Christian to the highest court. If Congress doesn’t raise the age of mandatory retirement for justices, Mr. Bolsonaro is set to name two members of the court by the end of his term.

Vale. For weeks, the region of Barão de Cocais in Minas Gerais has lived in fear of the possible collapse of an iron ore mine. Vale confirmed that part of the mine’s structure has indeed given way, but that it didn’t affect the reservoir. The company says one of the walls of the multi-level dam is slipping gradually, with little impact to the overall structure.

Protests. Last Sunday, Jair Bolsonaro supporters demonstrated against Congress in over 150 cities. The demos were smaller than the ones against cuts in the education budget on May 15, but bigger than those (also about education) on May 30. The display of support gave Mr. Bolsonaro some momentum, but it remains to be seen if his relationship with Congress will recover from now on.

Meat. Meat companies BRF and Marfrig are keen to merge their operations, creating a giant in the meat sector with diversified production and annual revenue of roughly BRL 80bn. The two firms reached a deal for exclusive negotiations with each other for the next 90 days—extendable for an extra 30. The terms of the deal would give BRF 85% of shares of the new company, while Marfrig shareholders would control 15% of equity.

Chart of the week

College degree no longer a shield against unemployment

Brazil’s unemployment figures were released on Friday, showing a slight reduction. In April, the rate of workers out of a job was at 12.5%, down from 12.7%. Still, 13.2m Brazilians remain out of the workforce. The number of discouraged workers has reached an all-time high at 4.9m. We broke down the data according to workers’ education level, and could see that the number of unemployed people with college educations (finished or not) has more than doubled since 2012. This goes along with the recent OECD findings that 60% of Brazilians believe personal effort and study are not enough to guarantee a prosperous future.

Markets this week

Brazilian retailers Magazine Luiza (MGLU3) and Centauro (CNTO3) spent the week trying to outbid each other to buy online sportswear retailer Netshoes (NETS)—a company buried in debt. In the latest move, Centauro offered USD 3.50 per share—75% more than Magazine Luiza’s first bid. Why?

Centauro, a sports goods retailer, desperately needs Netshoes to increase its market share in e-commerce and guarantee its survival. Magazine Luiza has a different approach. The company’s ultimate goal is to become the “Brazilian Amazon”—and, to do that, including more product categories in its marketplace is crucial. But there’s yet another reason, per Nord Research analyst Bruce Barbosa: buying Netshoes would give Magazine Luiza a reverse merger opportunity—that is, the chance of having shares listed in the New York Stock Exchange, where investors are keen on tech companies.

Natália Scalzaretto, TBR markets reporter

The government sparring before the pension reform

Written by Felipe Berenguer Levante Ideias de Investimentos

On January 18, 2019, President Jair Bolsonaro’s economic team issued MP 871/19—a provisional decree which cracked down on fraud in the social security system. The bill will serve as a good thermometer of exactly how much political capital the government has in Congress, in the lead up to the heated debates on the pension reform bill.

MP 871/19 aims to scrutinize the benefits given out by the pension system—trying to contain the massive drain caused by frauds and irregularities on several fronts. Besides more oversight, the bill establishes stricter eligibility rules for the benefits in the first place. That is the case, for example, of pensions paid to the families of prison inmates. According to the decree, only the families of prisoners in closed regimes will receive the benefit—no longer including those in so-called “semi-open” prison regimes.

The bill also conditions benefits for rural producers to their enrolment on the small rural producers register, and also enhances a revision of sick pay and disability pensions—a process which began during the Michel Temer administration.

Economy Minister Paulo Guedes’ team estimates yearly savings of BRL 9.8 billion after the bill’s approval. From 2023 on, however, savings go up to somewhere between BRL 17 and 20 billion per year. According to the government, flagging irregular beneficiaries will allow the social security system to clean up 16 percent of the 5.5 million benefits it currently grants.

Despite positive savings predictions, these numbers are not considered in the fiscal calculations of the pension reform bill—despite both bills concerning austerity measures, they have very different objectives. This makes MP 871/19 all the more welcome at a time when the government struggles with a lack of funds.

Passing the decree in the lower house

The resemblance with the pension reform, however, is more on the political field. MP 871/19 will give a good measure of the government’s support in Congress, as well as exactly how big a challenge it will face to approve the pension reform, when the time comes

However, if it is to be fully approved, Congress will have to be quick about it. There are several MPs expiring in the coming weeks, and MP 871/19 will become invalid after Monday (June 3). Like all other provisional decrees, it was initially analyzed by a special mixed committee—made up of representatives and senators. The rapporteur of the bill, lower house representative Paulo Eduardo Martins, proposed changes to the original text, which were very well received by the government’s economic team and approved by the committee.

Close to its expiry date, MP 871/19 was approved in the House on May 29, after an agreement between the government, unions, and a large part of the opposition. In truth, past experience dictates that once put to a vote, MPs are rarely voted down. The cost for representatives of voting against the measure is higher than if they pass it, even if they do not agree with parts of the legislation.

Therefore, a deal was made to approve the bill in the lower house. After the opposition promised it would not obstruct the vote, the bill was changed to state that the registration requirement for rural workers should be delayed from 2020 to 2023. The ease in approving the measure was such that it was passed by a symbolic vote, a mechanism usually used for bills which are a general consensus.

Approved in the House, the measure went on to the Senate, where it should have been voted on Thursday (May 30). As a result of other measures on the agenda, the Senate was unable to reach an agreement and delayed the vote on MP 871/19 for Monday, the last day before the measure expires.

Warning signs for the government

The biggest lesson which could be learned by the government from this vote is the need to negotiate in advance. While this clearly applies to provisional measures, which have fixed expiry dates, it is also true for other bills. For measures which change the constitution, for example, the changes are often profound and politicians have little incentive to approve them. The passing of MP 871/19 is a success for the government, but it should be taken with a pinch of salt—this was only a small taste of the challenge to pass the pension reform.

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