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Brazil pension reform

13 February 2019 Carlos Caicedo

Brazilian President Jair Bolsonaro's government has managed to elect as heads of the Lower House and the Senate two politicians belonging to the Democrats (Democratas: DEM), a key ally of the ruling coalition.

  • Brazilian Lower House Speaker Rodrigo Maia (re-elected) and new head of the Senate Davi Alcolumbre have indicated their support for the pension reform being prioritized by President Jair Bolsonaro's government.
  • The congressional election results for the government were better than expected, indicating that the ruling Social Liberal Party (Partido Social Liberal: PSL) is well-placed to assemble a working majority in the Lower House.
  • However, approval of the pension reform and Bolsonaro's conservative social agenda will face strong opposition; compromise would be necessary and the pension reform would be highly likely to be watered down.

On 1 February, the Brazilian Chamber of Deputies renewed the mandate of Federal Deputy Rodrigo Maia as the speaker of the Lower House. He was backed by the ruling Social Liberal Party (Partido Social Liberal: PSL), securing a solid majority of 334 votes out of 513. The following day, also counting on government support, first-term Senator Davi Alcolumbre was elected as the head of the Senate after a tumultuous voting process that included accusations of fraud and heated exchanges with the opposition.

The vote, which overall is a positive result for President Jair Bolsonaro's government, also consolidated the political base of the Democrats (Democratas: DEM), the mid-size party to which Maia and Alcolumbre belong to (29 Lower House deputies and six Senators). The DEM is an ally of Bolsonaro and his PSL. In addition to heading the Congress, the DEM also has three cabinet posts, making it a key player in the government coalition as well as the driving force behind its efforts to get fiscal and the pension reforms approved.

Government to count with strong support in the Lower House, but less so in the Senate

In the Chamber of Deputies (Lower House), the government's strategy of supporting Maia for re-election while giving up on plans to file a candidate of its own paid off. Maia, a skillful politician with good rapport even with the opposition, assembled a wide coalition that netted him more than 65% of the vote, avoiding a run-off. Maia also managed to neutralize a rival bid led by Chief of Staff Onyx Lorenzoni, who is Maia's main rival despite both belonging to the same party. Maia prevailed for now but such rivalry is likely to create internal rifts further down, potentially undermining the government's agenda in the Congress.

In the Senate, the race was a close one, where Alcolumbre came from behind to defeat veteran Senator Renan Calheiros from the Brazilian Democratic Movement (Movimento Democrático Brasileiro: MDB), who until the last minute appeared to be the favorite. In the end, Alcolumbre garnered 42 out of 81 votes, but only after three rounds of vote and accusations of illegal maneuvers, by the government camp against Calheiros, including pressure to senators to make their votes public. Eventually, Calheiros withdrew his candidacy, claiming the election process had not been democratic.

Alcolumbre is an ally of Lorenzoni and has indicated that he supports the approval of the pension reform. However, he is a new senator with no experience of congressional politics. According to media reports, Economy Minister Paulo Guedes would have preferred Calheiros to lead the Senate as he considered veteran Calheiros, who has been president of the Senate four times, better placed to push the government's agenda in the Upper House.

Key legislation

The government's congressional agenda is an ambitious one, which includes economic and tax reforms, privatizations, as well as a conservative social agenda. The latter comprises tougher laws against crime, proposals to strength the fight on corruption, relaxation of gun ownership, and easing of environment legislation. However, the top priority would be the pension reform, urgently needed to tackle Brazil's unsustainable fiscal deficit (7.5% of GDP) and contain rapid growth in public debt, currently at about 74% of GDP. Maia and Alcolumbre are in favor of the reform and recognize its priority. However, the reform is a constitutional amendment, which requires a three-fifths majority in both houses, including two vote rounds each. Given the fractured nature of the Brazilian Congress and the fact that the ruling PSL party has only 10% of seats, it will demand intense political negotiations. The situation is also compounded by the lack of details of the content of reform. Guedes has said the final draft will be sent to the Congress by the end of February.

Outlook and implications

Despite the apparent alignment of the heads of the Senate and the Lower House with the government's agenda, the reforms are unlikely to have easy passage. The pension reform is highly unpopular and will face strong resistance. The large vote obtained by Maia is deceptive as a good part of it reflected tactical vote by several small opposition parties. In fact, he has promised to seek the widest consensus for the reform, including consulting the opposition. This consensual approach risks diluting the reform, despite indications from Guedes that the government is aiming for a reform that is more ambitious than that promoted by the previous Temer administration. Guedes said his proposal would generate savings worth USD270 billion in the next 10 years. However, some of the reform features such as extending the retirement age for men and women to 65 have triggered strong rejection even from within the ruling coalition. Furthermore, in the Senate, the fall-out with an influential figure such as Calheiros would pose a major hurdle. His party MDB has the largest number of seats in the Senate, and if he manages to convince some of his party mates to join forces with the left, they could build up sufficient support to either stop or water down the reform. There is also the issue of the lack of experience of the new head of the Senate, which would make it more difficult to build consensus. The most likely outcome would be a diluted reform that would partially address the pension shortfall. Concessions would be required, most likely reducing retirement age to 62 for men and 57 for women, as hinted by Bolsonaro in early January. Vice-President Hamilton Mourão has noted that the final decision on the type of pension reform to be presented to the Congress would rest with Bolsonaro; as much has been recognized by Guedes. Given these dynamics, it is unlikely that the reform will be passed before July; the initial expectation was for the reform to be passed by April. This delay will generate fresh uncertainty denting business confidence. Infighting in the government ranks over the content of the reform, as well as realignment of political forces in the Senate, would constitute key indicators of the chances of the reform to get approved.

Posted 13 February 2019 by Carlos Caicedo, Senior Principal Analyst, Country Risk – Americas, IHS Markit

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