2018 Economic Outlook Brazil: Structural Reforms

In February 05, 2018, President Michel Temer delivered the annual Presidential Message to the Brazilian National Congress, marking the beginning of the legislative year for 2018. The official document advises on the key national policies, divided into five central pillars: Economy, Infrastructure, Social, Foreign Affairs and Public Administration. I will attempt to summarize the document by publishing chapters with the highlights.

1. Economic Outlook

The year 2017 presented the end of the longest economic recession ever recorded in the Brazilian history. The Gross Domestic Product (GDP) is increasing, inflation has slowed and unemployment and interest rates dropped. The year ended with an inflation rate of 2.95% p.y. (Extended National Consumer Price Index, or IPCA for Portuguese) and with the basic interest rate of 7% p.y. (Selic – Sistema Especial de Liquidação e de Custódia), the lowest since 2002.

Desempenho PIB 2017

2. Cash Withdraws From Severance Funds

Cash withdraw measures adopted in 2017, from public funds, contributed to the reduction of household debt and the expansion of consumption. The Federal Government facilitated access to the FGTS accounts (Guarantee Fund for Length of Service) of 26 million beneficiaries, which injected R$ 44 billion in the economy, along with the anticipation of R$ 2,2 billion in withdraws from 1,6 million retiring beneficiaries of the PIS/Pasep accounts (Social Integration Program and Heritage Formation Program for Public Servers).

3. Fiscal Reform

The Constitutional Amendment No. 95 of December 15, 2016 was responsible for creating the new Fiscal Regime, which limited public spending growth, modified the fiscal policy and, along with other proposals related to public accounts, reduced the uncertainties regarding fiscal policy conduct in the country.

4. Regime for the Fiscal Recovery of States

The Complementary Law No. 159 of May 19, 2017 established the Fiscal Recovery Regime (Regime de Recuperação Fiscal – RRF), seeking to enable the recovery and solvency of states suffering from serious financial crises. In general terms, when adopting the RRF, both State and Union recognize the financial imbalance of the State and specify the adjustment measures, with respective impacts and deadlines, as well as the sources of funding that will be used in the period of the recovery plan.

5. Modernization of Labor Laws

The labor market also presented significant changes and signs of mild recovery. The modernization of the labor laws, a reform approved in July 2017, resulted in the Law No. 13.467/2017, which updated the Consolidated Labor Laws (CLT) framework. The new structure reduces uncertainties and allows greater autonomy for workers and employers to enter into agreements. With the newly adopted legal framework, the government expects to reduce informality in employment and increase job posts and wages.

6. Social Security Reform

In 2017, Social Security registered a record deficit of R$ 268.7 billion. The National Congress is currently debating over its Social Security Reform as an essential component of the reform package for economic recovery, aimed at balancing the public social pension accounts.

The demographic dynamics of the country is imposing significant challenges on policy-making, and in the case of social security, the impacts are direct. Brazil is experiencing an increase in life expectancy, and consequently, in the amount and duration of payments of the security benefits. Added to this is the decrease of reproduction rates, which alters the proportion of active individuals in the job market. This is a relevant fact because the Brazilian social security system is based on simple allocation, being that active workers pay the benefits for those who have withdrawn from the labor market. In 1980, there were 13 adults for each elderly person. Today, there are nine adults for each elderly person. The demographic bonus for federal and state public servers is in an even more critical condition: 1,2 and 1,4 active worker for each beneficiary, respectively.

7. Long Term Rate for Public Financing

The new Long Term Rate (Taxa de Longo Prazo – TLP), established by Law No. 13.483 of September 21, 2017 replaced its former equivalent, as the basis for compensation on the main sources of long-term financing in Brazil. The new TLP will remunerate these financings when applied by the official credit operators contracted from January 2018 onwards. The new rate is composed by the variation of the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – IPCA) and by a monthly prefixed interest rate that is based on the earnings of the National Treasury Notes – Series (NTN-B) for a five-year period. This term reflects the average time for the BNDES (National Bank for Economic and Social Development) loans that use such rate as a basis for compensation.

Source: Mensagem ao Congresso Nacional 2018

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