Social security reform has swung from the fast to the slow track in Brazil - which is creating disappointment in the early days of the government of President Fernando Henrique Cardoso.
Sweeping social security reform - in the shape of a constitutional amendment - had been high on the agenda for the new government. Other constitutional reforms expected early on were economic and, separately, tax/financial system reforms.
Many thought a popular new president could steer programs through the Congress, although reforms in Brazil traditionally have been slowed or stymied by the myriad fractious political parties there.
That optimism was premature. So far there's only been progress - but not yet passage - on the first of the three main areas for constitutional reform. That initial thrust involves constitutional change to allow private investment in, or operations with, certain state-owned companies. These provisions could set the stage for future privatization of some state-owned businesses, such as Petroleo Brasileiro or Telebras S.A.
But the proposal to reform social security - to make it fairer to the public and less costly to government - hasn't made it out of legislative committee.
Instead of acting on the initial proposal, legislators decided to split the plan into four components; these will be considered individually. That means reform of this pay-as-you-go system is likely to be put off at least for months; many think its passage won't come until 1996.
The far-reaching plan to reform social security met opposition from a number of special interest groups. And, evidently, the government wasn't prepared to make its case. "From what I understand, the government ....did not run as extensive a public relations campaign as was necessary" said Angela de Oliveira, a consulting actuary in the San Francisco office of Watson Wyatt Worldwide.
According to Thomas Atkinson, an analyst with Baring Securities Do Brasil, in Sao Paulo, the main features of social security reform include: establishing a benefit ceiling of as low as five times the minimum wage, with the private sector supplying complementary pension coverage; increasing the number of years required to collect retirement benefits; linking payouts to contributions; and banning states and cities from creating their own retirement systems.
According to Mr. Atkinson, Brazil's social security system is not yet in deficit; but it could be as early as this year. "Payouts have been rising at an alarming rate. In 1988, for example, the government paid out 60% of what it received in social security contributions. This rose to (nearly) 100% in 1994, and if left unchecked, could rise to over 105% in 1995. That's because (retirement payouts for) government workers and military personnel are 20% higher than when they were active. (Moreover), the average worker retires at 52. The government hopes to boost this to 62," Mr. Atkinson said.
Such changes are vitally important to a government that needs to cut spending and reorder fiscal/budgetary matters to keep inflation in check. Last July, the debut of the real anti-inflation program was a big success in shaving inflation from about 50% a month before then to less than 2% this past January. But, experts point out, this program won't work forever in combating inflation unless fundamental economic/budgetary reforms take place that address inflation's causes.
It's these and other reasons that worry some investors in Brazil. "In the absence of constitutional reforms, it becomes difficult to envision the continued stabilization of the sort we've seen" since last July, said Michael MacPhee, Latin American investment manager for Baillie Gifford Overseas Ltd., Edinburgh, Scotland. His firm is marginally underweighted in Brazil right now. "I'm still underweighted (in Brazil's market) because of the concerns I have in common with everyone else: we need hard evidence that constitutional reforms are moving in the right direction and that (Brazil's) Congress is convinced of the need for it," he said. (Among the various reasons cited for the Congress' failure to act swiftly on the package of economic/social security/tax reforms: a perception that the success of the real plan makes quick legislative moves unnecessary.)
However, concern about the pace of reforms isn't deterring some investors. Paul White, manager of the $40 million Latin America portfolio of the pension fund of Atlantic Richfield Co., Los Angeles, acknowledges the slow pace of Brazilian reforms, which is not "positive," he said. But comparatively low stock prices in Brazil reflect that consideration, he believes. He has been adding to his Brazilian holdings lately, and expects a "significant market rally" in Brazil "some time this quarter or toward midyear." The reason: not only that "stocks are cheap, but also because of the expectation of strong economic and earnings growth" in this market, said Mr. White.
Frank Fernandez, CEO of GLobal Emerging Markets Advisors L.P., New York, believes the Brazilian market "is grossly undervalued. We're looking for strong real earnings-per-share growth (of 20% to 25% over the next 12 months) and continuing" strength in Brazil's economy, he said. He feels Brazil's market is now a buying opportunity, because most shares are priced below book value. But because of high volatility in Brazil's market, investors should buy and hold stocks for the longer-term, he cautioned.
Although market volatility will continue, "there is money to be made in Brazilian stocks" over the medium term, said Baring's Mr. Atkinson. As he sees it, the market's "upside potential is quite large and its downside pretty small."
Brazilian stocks that Baring recommends: Telebras; Centrais Electricas Brasileiras S.A.; Cemig, a power generator and distributor; steel producers Usiminas S.A. and Cosipa; Copene in feedstock petrochemicals; Petroleo Ipiranga; Klabin in pulp and paper; Bradesco Group; Companhia Cervejaria Brahma in beverages; and cement maker Cimento Itau.