WHEN WILL BRAZIL´S FUTURE ARRIVE?: INVESTORS SEEM CONFIDENT THAT AN ECONOMIC RECOVERY IS UNDERWAY / THE ECONOMIST

When will Brazil’s future arrive?



Investors seem confident that an economic recovery is under way



But there is still plenty that could go wrong









AFTER a grinding two-year recession, the longest in Brazil’s history, a recovery has been slow to materialise. The IMF expects GDP growth of just 0.3% this year. The joblessness rate is 13%. Last year’s fiscal deficit, including large interest payments, was nearly 9% of GDP.



Lower-than-expected tax receipts have forced the government to accept that for the next four years the budget deficit will be higher than planned.



But markets seem unperturbed. The Bovespa, Brazil’s benchmark stock index, is back at levels not seen since May, when a leaked recording of the president, Michel Temer, apparently discussing bribes threw politics into chaos and put his future in doubt. The Brazilian currency, the real, strengthened by 6% in July.



Some of the optimism is based on a conviction that after such a long slump, a rebound cannot be far away. Higher prices for commodities are helping: Brazil is a big exporter of many, including soya and iron ore. Interest rates, which were kept high throughout the recession to curb inflation, are falling. In July, despite his indictment on corruption charges, Mr Temer managed to pass a reform of labour laws that have long throttled growth. He is now trying to simplify a convoluted tax code that means a typical firm has to spend 2,038 staff-hours a year on compliance.



But hopes for a robust recovery ride above all on Mr Temer’s promise to bring public spending under control. Last December he persuaded congress to agree to a 20-year real-terms spending freeze. For it to stick, however, he will have to reform a pension system that entitles Brazilians to retire, on average, at just 58. Pensions already cost 13% of GDP. Without an overhaul, government spending on pensions could reach a fifth of GDP by 2060, when the number of over-65s is projected to increase from 17m now to 58m.



Fewer golden years



A measure setting minimum retirement ages of 65 for men and 62 for women had looked close to gaining the three-fifths majority needed in the lower house when the scandal involving Mr Temer broke. Some of his congressional support then evaporated. Markets took fright. “It was like a cold slap in the face, a reminder that this is Brazil,” recalls James McCormack of Fitch, a ratings agency. On June 26th, Mr Temer was indicted on corruption charges by Rodrigo Janot, the chief prosecutor.



But on August 2nd legislators voted by 263 to 227 against referring Mr Temer’s case to Brazil’s supreme court. (No lower court can try a sitting president.) Now analysts feel fairly confident that he will complete his term—which they regard as positive in light of his reform agenda. “Markets are agnostic about personalities,” says Arthur Carvalho of Morgan Stanley, an investment bank. “They are focused on results.”



The Party of Brazilian Social Democracy (PSDB), Mr Temer’s largest coalition partner, is thought likely to back a renewed effort to rein pensions in. Though some of its deputies voted against him on August 2nd, most agree that the reform is necessary. It hopes to have a shot at the presidency next year, probably with either Geraldo Alckmin, a four-time governor of São Paulo state, or João Doria, the mayor of São Paulo city. The PSDB would prefer Mr Temer, who will not seek re-election, to be blamed for the unpopular measure.



A lot depends on how much the reforms are watered down. Mr Temer had already conceded a more gradual raising of the minimum retirement age than originally envisaged, which had cut the potential savings over ten years by about a quarter. His weakened political position means more concessions will probably be needed, such as allowing rural workers to draw pensions earlier than had been intended, and further extending the transition period. The result may provide just half of the savings originally hoped for. That is worrying: even the original proposal would not have been enough to stop Brazil’s public debt rising, points out Mr McCormack. It is already above 70% of GDP, high for a middle-income country.



Mr Temer’s position is not entirely secure. Mr Janot, who steps down on September 17th, is thought to be preparing to indict the president once more. Another source of danger is Eduardo Cunha, a former speaker of the lower house who was close to Mr Temer. He is co-operating with prosecutors in an attempt to reduce his prison sentence for corruption. If he implicates Mr Temer in wrongdoing, some of the congressmen who supported the president in the last vote might switch sides.



Another question is whether the next president will continue Mr Temer’s reforms. The latest polls put Luiz Inácio Lula da Silva, a former president who oversaw a big increase in public spending, ahead of other likely candidates. He is followed by Jair Bolsonaro, a far-right congressman who admires the former military dictatorship. Neither would be considered market-friendly. It is still early days, but more is usually known at this stage about who will run for president.



Mr Temer hopes pension reform may help salvage his reputation. But he is in a race against time. Congressional seats are also up for election next year. Deputies hoping to retain theirs will be too preoccupied by electioneering to get much done, reckons Fabio Giambiagi, a pensions expert. With each revision to the bill requiring a separate vote, “the window of opportunity is closing”, he says. Congress is also attempting to reform campaign-finance laws. A new law must be passed before October 7th if it is to come into force before next year’s elections. The markets are betting that Mr Temer, a consummate dealmaker, can gather enough support for his fiscal agenda. But that is far from certain.