March 13, 2019 / 9:27 PM / 5 months ago

UPDATE 2-Brazil economy minister warns against severely watered down pension reform

(Adds detail, central bank chief’s comment)

By Jamie McGeever

BRASILIA, March 13 (Reuters) - A diluted reform of Brazil’s pension system that delivers less than half the 1.2 trillion reais ($314 billion) in savings outlined in the government’s plan would threaten future generations, Economy Minister Paulo Guedes said on Wednesday

Guedes has said savings over the next decade from social security reform should total at least 1 trillion reais. If Congress waters that down to 500 billion, it would make it impossible to transform the state-based system to personal retirement accounts, he said.

“We need 1 trillion (reais) so we can have the financial muscle to fund the transition toward a system of individual retirement plans,” Guedes said at a ceremony at the central bank in Brasilia marking the swearing-in of Roberto Campos Neto as the bank’s new president.

“But if Congress dilutes that to only 500 (billion), you end up condemning your children and grandchildren, there’s no individual retirement funds, and the old system stays in place,” Guedes said.

Shoring up the social security deficit, by far the largest drag on the country’s creaking finances, is right-wing President Jair Bolsonaro’s cornerstone policy to revive the economy and stimulate investor confidence in Brazil.

Investors and private sector analysts are more skeptical about Guedes’s 1 trillion reais minimum target, with the median savings over 10 years expected to be around 700 billion reais, according to two major investor surveys recently.

At his swearing-in, Campos Neto repeated pledges he made at his Senate confirmation hearings last month to make Brazil more attractive to foreign investors, expand credit to small firms, and increase the presence of fin techs across the economy.

He also said the central bank must build on the gains delivered by the monetary policy path pursued by his predecessor Ilan Goldfajn, which was characterized by “caution, serenity and perseverance” and has seen interest rates anchored at a record low 6.50 percent for almost a year.

But the U.S.-educated former banker may have his work cut out. The economy almost ground to a standstill in the fourth quarter of last year and annual growth in 2018 was no better than it was the year before, at just 1.1 percent.

Early indications suggest 2019 will be just as challenging. Figures on Wednesday showed industrial production fell 0.8 percent in January, far more than expected.

Interest rate futures markets now imply more than a 60 percent likelihood that rates will be cut by January next year.

$1 = 3.8136 reais Reporting by Jamie McGeever and Marcela Ayres; Editing by Leslie Adler and Tom Brown

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