The architect of a potentially transformational social security reform
Paulo Guedes took charge of Latin America’s largest economy in January 2019 as it stumbled under the strain of years of corruption scandals, political stalemate, and falling investment.
If the shift to a market-friendly administration meant market expectations were high, there was great uncertainty as to whether a government led by a polarising president would be able to achieve the reforms necessary.
Central to those hopes was a social security reform that investors saw as necessary to tackle the pension burden at the heart of Brazil’s fiscal problems.
Guedes himself tells GlobalMarkets that public spending had ballooned from 18% of GDP 40 years ago to 45% at the peak of Dilma Rousseff’s 2011-2016 administration. This was a “fiscal black hole threatening to derail the whole economy”, says Guedes.
On October 2, Brazil’s Senate passed the reform in a first round vote, leaving just one final round of voting required. The pace of approval has “defied the odds”, says Edward Glossop, EM economist at Capital Economics. “Progress on Brazil’s pension reforms has been swifter than we initially expected.”
Some dilution during the arduous process in such a divided political system as Brazil’s was inevitable. Still, the R$800bn ($195bn) of savings that Capital Economics projects that the reform will bring is still going to be “transformational”, according to one major EM bond investor (the ambitious first draft in February sought to save more than R$1tr).
Álvaro Vivanco, Latin America strategist at NatWest Markets, believes that Guedes is “delivering strongly” on reforms and “appears to have managed the political process very well”.
“Given how difficult it is to carry this type of reform in any country, Guedes deserves credit for sticking to his principles,” says Vivanco.
Shelly Shetty, head of sovereign ratings for Latin America at Fitch, adds that Guedes has been able to “keep a lid” on spending while facing difficult choices, and highlights that the reform is “key for improving the structural outlook of public finances over the medium to long term”.
“Although there is still a lot of work to be done in Brazil, the government has moved in the right direction in several areas — fiscally, in terms of pension reform, and with potential privatisations,” says Shetty.
