Once the uncertainty of the pension reform is out of the way, pent up spending will be released and Brazil can embark on multi-year cyclical expansion.
After all, the currency is competitive, the external balances are healthy, central bank credibility has been restored and there is enough spare capacity to allow the economy to grow for many years before inflation becomes a challenge.
Indeed, Mr Bolsonaro may even be able to get on with his other policy objectives, including privatisations and deregulation. Foreign investors will approve and return to Brazil.
Key points
- Brazil is trying to reform its pension system
- Problems set in under Lula da Silva
- If reform happens then Brazil's economy could be rescued
The hesitation of the private sector, although strongly in favour of the pension reform, could ironically undermine the odds of its passage.
Economic weakness discourages parliamentarians from supporting reforms, which inflict pain on significant and vocal segments of the labour force, such as public sector workers.
Brazilians have already started taking to the streets in protest against spending cuts elsewhere in the public sector.
The government is bound by a fiscal rule, which means that cuts in education and other public spending become inevitable unless the pension deficits are reduced.
It follows that the longer it takes to pass the pension reform the worse the economy will get.
Stabilising finances
Still, despite all these challenges, it is likely that parliament will pass the pension reform sometime within the next few months.
A majority of parliamentarians recognise that there is no even remotely palatable alternative.
Mr Bolsonaro’s trade-offs will certainly water down his reform, but even fiscal savings of R700bn, down from the original target of R1.2tn, would still go a long way towards stabilising Brazil’s public finances.
Once the uncertainty of the pension reform is out of the way, pent up spending will be released and Brazil can embark on multi-year cyclical expansion.
After all, the currency is competitive, the external balances are healthy, central bank credibility has been restored and there is enough spare capacity to allow the economy to grow for many years before inflation becomes a challenge.
Indeed, Mr Bolsonaro may even be able to get on with his other policy objectives, including privatisations and deregulation. Foreign investors will approve and return to Brazil.
Jan Dehn global head of research at Ashmore Group
