Brazil's Senate concluded its first floor vote on a pension reform proposal that was weakened by a last-minute change, reducing the impact of President Jair Bolsonaro's main initiative to tame a rising debt load.
Senators approved legislation that toughens access to retirement benefits by a tally of 56-19. In subsequent votes on bill amendments, they also backed a proposal to maintain an annual bonus to low-income workers that will reduce the reform's estimated savings by 70 billion reals to about 800 billion reals ($192 billion) over a decade.
The proposal that sets a minimum retirement age now moves on to a second and final Senate floor vote later this month, which is the final step before becoming law. The measure is key to restoring investor confidence in Brazil's finances, although it won't stabilize the country's debt as a portion of gross domestic product before 2023, according to official estimates. Brazil's public debt currently reaches nearly 80% of GDP and is estimated to grow to as much as 83% of GDP over the next four years before stabilizing, if the reform is approved.
Luiz Eduardo Ramos, government affairs secretary, told reporters in Brasilia that the administration views the vote as a victory. He highlighted the fact that most of the amendments were rejected.
"I was asked if I have an official position on the defeat we suffered," he said. "The question does not have any basis. What defeat is that?"
Still, many investors were less upbeat. Brazil's benchmark Ibovespa stock index fell as much as 3% in Wednesday trading, marking the biggest intraday drop in over a month, while swap rates rose as investors worried about the gradual reduction in savings from the reform.
"The weakened reform is bad news," said Vladimir do Vale, chief strategist at Credit Agricole Brasil. "The government has an ambitious agenda in Congress, and again it's showing a lack of political coordination."
Advances in economic reforms including the pension overhaul have facilitated a monetary easing cycle by removing uncertainty that could boost the country's risk premia. Brazil's central bank last month lowered the benchmark interest rate to an all-time low of 5.5% and signaled more cuts are on the way amid an improved inflation outlook and a gradual economic recovery.