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

Date: 5 Apr 2019

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

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Tagged with: Brazil Economics and Global Source Partners