Brazilian assets tumbled over the past week as President Jair Bolsonaro's administration faced nationwide protests, setbacks in the approval of key decrees and new strains in its relationship with Congress. Yet the prospects for pension reform are finally looking up.
Political consultancy Eurasia raised the odds of approval of the government's flagship economic proposal to 80%, up from 70%, citing lawmakers' waning resistance to a measure deemed vital to Brazil's finances. Bank of America Merrill Lynch upgraded the nation's sovereign bonds to overweight, saying it's more confident the government can deliver a reform that would be deemed positive by investors.
"Support in Congress appears to be increasing amid more willingness by the government to engage in political negotiations," Merrill Lynch analysts Jane Brauer and Lucas Martin wrote in a note last week. They added that Brazil's low short-term growth may push lawmakers to prioritize pension reform.
It's a similar argument to the one made by Eurasia, which is betting that lawmakers are now more committed to the pension overhaul. Economy Minister Paulo Guedes has issued dire warnings about Brazil's outlook if the reform doesn't pass, and even engaged in shouting matches with lawmakers on the subject. Over the past few days, local media has reported lawmakers' plan to present an alternative pension reform text, as the government struggles to make the case for its own proposal.
Shamaila Khan, AllianceBernstein's director of emerging-market debt, sees greater chances of the government approving a pension reform that leads to savings of at least 600 billion reais ($146 billion) over 10 years.
"The probability of a higher number has slightly increased because of the broad agreement on the importance of the reform," she said.
The pension bill cleared the lower house's Constitution and Justice Committee in April, much later than expected. The text is now before a so-called special committee, where it will be discussed in up to 40 sessions, and where it's likely to undergo changes.
Brazil's real fell more than 3.5% last week, leading the drop in emerging-market currencies as protests added to political tensions and growth forecasts fell, adding to a broad sell-off in risky assets. The $8 billion iShares MSCI Brazil ETF — the largest exchange-traded fund tracking Brazilian equities — erased gains for the year.
"We believe the government will be able to approve the reform," hedge fund firm SPX said in its monthly letter to clients last week. "Not for its own merits, but because a good part of congressmen know that, without the reform, the country would head towards a permanent fiscal crisis."