April 4, 2017 By FTI Consulting
Our lead analysis this week is about President Michel Temer’s last push to pass a wide-raging pension reform in Congress. We think Temer will likely secure approval for the legislation over the next four months, so the crucial question is not “whether” but “how” Brazil will reform its pension system. The threshold in Congress for this type of structural change is high — a three-fifths majority in both houses — and it is clear that the government’s initial proposal will not receive the necessary votes. The time for hard political bargaining and compromises has arrived.
If, as we expect, Temer manages to keep the three most important points of the legislation largely untouched, the reform will be seen by the market as a big success. But increased resistance by lawmakers may demand some deeper concessions. We think the complete implosion of the reform will only happen in very extreme (and unlikely) scenarios, like Car Wash posing an existential threat to the government and paralyzing its legislative agenda. The most probable negative scenario is an underwhelming reform that doesn’t address the unsustainable cost trajectory of Brazil’s pension system.
Also on Brazil, the scandal involving the meat industry is still causing considerable pain. JBS, the world’s biggest meatpacking company, is allegedly having second thoughts about a $1 billion IPO in New York initially scheduled for May or June (although the company is officially denying these reports). Here we are looking at repercussions in two crucial areas for Brazilian politics and policy.
First, the controversial police operation against meatpacking facilities has emboldened forces in Congress seeking to limit the powers of prosecutors and the judiciary. Their target is Operation Car Wash. Second, Brazil has for a long time fought to convince foreign governments that its highly competitive meat industry obeyed the highest sanitary standards. The scandal has a huge reputational cost at a time when free trade negotiations with the EU are moving forward and, more broadly, Brazil is trying to pivot to a much more open approach to trade.
Still on trade, we doubt Mexico will threaten to slap tariffs on US corn to pressure Trump on NAFTA. But the Mexicans could eventually act “indirectly” by exempting Brazilian and Argentinian agricultural goods from duties. This would pressure US corn producers, while deepening economic ties to the rest of Latin America — a decades-old (and still unfulfilled) promise of Mexican diplomacy.
In any case, Peña Nieto will stick to his wait-and-see approach and is very unlikely to make big moves anytime soon. The Mexican economy is doing surprisingly well and there is no need to rush into a confrontation with Trump.
Lastly, latest polls in Colombia confirm our hypothesis that corruption will be one of the most important (if not the most important) topic in the 2018 presidential election. This is good news for candidates that have remained distant from the Santos-Uribe polarization, such as Claudia López and Sergio Fajardo. Given his proximity to the president and reputation as an establishment figure, former Vice-President Germán Vargas Lleras should be worried about his negative image.