BRASILIA (Reuters) - Brazil’s Economy Ministry warned on Friday that the economy will slip into recession next year and official interest rates could more than double unless Congress approves measures to reduce the deficit in the country’s pension system.
The warning comes days after President Jair Bolsonaro presented his ambitious social security reform plan to Congress, which aims to save over 1 trillion reais ($295 billion) in the next decade.
Overhauling the creaking social security system is seen as critical to shoring Brazil’s public finances, boosting investor confidence, fostering growth and keeping interest rates and inflation under control, most economists say.
In its first official forecast on the potential impact on the economy over the next five years of reform or no reform, the Economy Ministry laid out starkly contrasting scenarios.
“In the event of no pension reform, GDP growth in 2019 will be 1 percent lower and Brazil will enter recession in the second half of 2020, approaching the level of losses seen in the 2014-2016 period,” the ministry’s economic policy division warned in the report.
It said growth this year would slump to 0.8 percent from 1.3 percent last year — far weaker than the market consensus of around 2.5 percent and much worse than the 2.9 percent “best case” scenario of reform being passed.
Recessionary forces would also deepen over coming years if the pension system stays unchanged, the ministry said. The economy would shrink by 0.5 percent in 2020, by 1.1 percent in 2022 and as much as 1.8 percent in 2023.
(Graphic: Brazil GDP scenarios - tmsnrt.rs/2BPaImH)
(Graphic: Brazil unemployment - tmsnrt.rs/2VgORvT)
(Graphic: Brazil interest rates - tmsnrt.rs/2BORtd3)
It said benchmark interest rates will soar past 11 percent by year end from the current record low of 6.50 percent, and as high as 18.5 percent by 2023. Most economists expect rates to be on hold for the rest of this year.
But if reform is passed, growth will accelerate, job creation will surge and interest rates will fall, the Economy Ministry predicted.
The benchmark Selic rate could be reduced to a new low of 6.0 percent later this year while the economy could create as many as 8 million new jobs by 2023, it said.
Economists have already factored in pension reform into their forecasts and say the outlook is not that strong even if something is approved this year, most likely a diluted version of Bolsonaro’s bill.
Corporate and household balance sheets have not been fully repaired since the 2014-16 recession, the international picture is cloudy, and not everyone is convinced the new administration will deliver on its pledges.
Reporting by Jamie McGeever; Editing by Richard Chang and David Gregorio