September 4, 2017 / 7:49 PM / 2 years ago

Pension reform in Brazil unlikely before 2019: Itaú economist

SAO PAULO (Reuters) - Brazil is unlikely to reform its costly pension system before 2019 because President Michel Temer, hobbled by a corruption scandal, is too weak to push the measure through Congress, the chief economist of Brazil’s largest bank told Reuters on Monday.

The lower house of Congress last month blocked a potential corruption trial against Temer, but chief prosecutor Rodrigo Janot has signaled he could file at least two more graft-related charges before stepping down in the coming weeks.

“The government’s ability to set the legislative agenda weakens if it has to use political capital for other ends,” Itaú Unibanco Chief Economist Mario Mesquita told Reuters.

“Our baseline scenario no longer considers that the pension reform will be approved this year or the next,” he said.

General elections are scheduled for October 2018 and Mesquita said any reform of the social security system was likely to come sometime after a new government was in place.

Temer needs the support of at least 308 of 513 lower house members to pass his pension reform plan, which investors see as critical to curb government debt and restore long-term growth.

Mesquita’s comments echo a growing perception that Temer will not fully deliver on his austerity pledges, which have fostered investor optimism but also kept his approval rates near record lows.

Temer’s fiscal struggles have begun already. After failing to raise support in Congress for new tax hikes, the government loosened its annual budget targets through 2020, signaling seven straight years of deficits.

Policymakers must further cut spending to meet this year’s goal even after it was softened, said Mesquita, a former central banker.

A Reuters poll showed that the government would need to take further action to achieve fiscal targets though most economists expect it to raise taxes or sell assets instead of cutting spending.

Mesquita said the possibility of Brazil missing its fiscal targets is unlikely to trigger a market sell-off as low interest rates in developed markets maintain demand for emerging market assets. Hopes that a market-friendly candidate wins next year’s elections may also prevail over short-term blows, he added.

His remarks come as economists begin to turn slightly more bullish on Brazil’s recovery from its deepest recession in a century.

Mesquita said he was revising his forecast for 2017 economic growth to around 1 percent from 0.3 percent after second-quarter growth surpassed market expectations.

Reporting by Luiz Gerbelli and Patricia Duarte; Writing by Bruno Federowski; Editing by Tom Brown

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