Brazil government bullish on pension reform, foreign investors wary
Senior Brazilian officials charged with steering pension reform through Congress insisted on Tuesday that they had ended recent political finger-pointing that threw the government’s key reform bill into doubt, but some U.S. big banks were not convinced.
Brazilian stocks hit a nearly three-month low and the real fell to a six-month low last week on growing signs of political infighting and skepticism that President Jair Bolsonaro was fully committed to the political consensus-building needed to get lawmakers to pass his pension reform bill.
The message on Tuesday, however, from Vice President Hamilton Mourao, Labor and Pensions Secretary Rogerio Marinho and the government’s leader in the lower house, Vitor Hugo, was that Bolsonaro is listening and ready to work with Congress.
“A page had been turned,” Hugo said.
But it will take more than rallying cries of unity in Brasilia to convince some of Wall Street’s biggest beasts that their clients should put any more of their money into Brazil.
Strategists at Morgan Stanley and Citi this week issued notes recommending caution, warning that although last week’s slide makes Brazilian assets more attractive, it is still too early to load up on them.
“Brazil is entering crunch time in its pension reform process, with a corresponding increase in volatility,” Citi’s emerging market credit team wrote in a note. Both sovereign and corporate Brazilian high-yield bonds are the most vulnerable across the emerging market fixed-income universe, they added.
Markets have since recovered from last week’s slide, but some investors argue they are still not seeing enough compensation for the risks involved.
“Risk premia across (Brazilian) assets remains relatively low compared to past episodes of stress, which make us reluctant to add risk at current levels,” wrote Morgan Stanley strategists on Tuesday, adding that they will only consider adding exposure to Brazil if the real falls to 4.20 per dollar.
The real closed on Tuesday at around 3.8550 per dollar, pulling back from last week’s slide past 4 per dollar.
The government’s plan targets over 1 trillion reais ($260 billion) in savings over the next decade from a radical overhaul of the social security system to shore up the public finances, revive the economy and boost investor confidence in Brazil.
But the proposal is likely to be watered down as lawmakers extract concessions and exemptions.
A survey run by transparency group Atlas Politico on Tuesday showed that the government currently has the support of 171 of the 308 lawmakers needed for the bill’s passage in the lower house, which would send the proposal to the Senate.