1. NS4540 Winter Term 2019 Brazil
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Brazil Overview

3. New Optimism I
Optimism after the election of Jair Bolsonaro as President of Brazil
Due to clear plans for reforms (by Brazilian standards) and consolidation of congressional support to pass them.
It is unclear how profound the reform will be, but the most likely scenario suggests that it could at least stabilize the debt/GDP ratio.
A BRL rally developed as a result of that optimism.
The global reversal in oil prices pushed inflation down, significantly lowering expectations.

4. Pension Reform I
The market’s optimism has also increased business confidence significantly
Leading to higher growth expectations.
The main risk is if Congress fails to approve pension reform or waters it down so much that the debt/GDP ratio keeps growing.
There is 10% probability that Congress fails to approve the reform altogether
Also a similar probability that they approve only a very watered-down version.
Leaves an 80% probability of Congress approving a significant pension reform, including a 30% probability of approving a version that reduces the debt/GDP ratio in the next five years.

5. Pension Reform II

6. Recent Developments I February 20, 2019
The Brazilian government has handed its pension reform proposal to Congress
Markets got what they expected: a solid pension reform proposal with BRL1.1 trillion in savings over 10 years.
The reaction was mild as the savings will likely be reduced in the final bill.
Final bill likely close to our baseline scenario and expect moderate market gains.
Government will attempt to limit any potential watering down of the bill.
The proposal is solid, with the government estimating BRL1.1 trillion in savings over the next 10 years.

7. Recent Developments II
Markets had priced in the proposal and reacted with relief, but did not rally.
The main reason for the muted reaction is that investors expect Congress to water down the bill.
How much savings are reduced will determine the final market response.
The government has already hinted that it expects Congress to reduce savings.
Would like it to limit the reduction to something around BRL billion,
This would ensure the positive impact on the fiscal accounts will be enough to keep the debt/GDP ratio around 80%.

8. Recent Developments III
Moody’s has already said that if the pension reform is approved, it will support the sovereign rating.
However, we are not expecting a return to investment grade in the next two years, even in the best-case scenario.
The timeline for approval is September, with the House basically setting the final proposal in June, so the Senate can vote it up or down in Q3.