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IN THE NEWS: Affonso Pastore on Bloomberg - "Ex-BCB Chief Sees Limited Upside, Extra Risk From Pension Bill"

April 5, 2019 By George Lei (Bloomberg)

Approval of Brazil’s pension reform bill would trigger limited gains for the real, while a watered-down bill would weigh on it far more, according to former central bank President Affonso Pastore, an analyst at GlobalSource Partners.

* A strong reform bill could save up to 1.2t reais in 10 years, remove a major risk and help growth rebound, yet Pastore expects only limited BRL appreciation under that scenario
** Inflows won’t rise substantially until Brazil regains investment-grade status, a change that could take years
** Bill approval expectations are already reflected in asset prices; risk premium won’t see a big reduction even if bill passes
** Commodity prices aren’t expected to climb, removing an important pillar for BRL strength
** BCB may eventually raise rates after some initial cuts, possibly taking Selic to 6% from 6.5% now
* A watered-down bill with much lower savings, if approved, will likely hurt confidence, weigh on currency and prolong already anemic growth
** Inflation won’t pick up much even if real were to fall to all-time low; FX pass-through to CPI seen at close to zero and BCB is more likely to hold rates
** Likelihood of this scenario materializing is "large enough" to warrant careful monitoring
** NY-based investors appear more pessimistic and skeptical over pension bill outcome vs those based in Brazil
* BRL fluctuations won’t be as intense as they were over the past decade; unlikely to see a massive appreciation or depreciation in medium term
** 2003-11 BRL rally was a result of both much lower risk premium domestically and much higher commodity prices, while real’s 2012-15 slump occurred as both factors unwound quickly; combination of such conditions probably won’t repeat in future