Rating downgrade causes friction among Temer allies

Friday, January 12, 2018

The downgrade of Brazil's sovereign rating by Standard & Poor's has caused a rumpus among the government's political allies, which could make it even more difficult to advance highly unpopular pension reforms.

On Thursday, S&P downgraded Brazil's rating to 'BB-' from 'BB', putting Latin America's largest economy three notches below investment grade status. Brazil reached investment grade in 2008, as the country's economy was booming, but lost it in 2015 after consecutive years of ballooning debt.

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"The weakening of our institutional assessment of Brazil reflects slower-than-expected progress and lower support by the country's political class to put in place meaningful legislation to correct structural fiscal slippage on a timely basis," said S&P.

The rating agency's decision came as the government faces huge challenges to approve the pension refom, considered crucial to reducing government debt and spending in the long term. But instead of serving as a warning to politicians about the urgency of the reform, the downgrade has created further turmoil.

Officials, including finance minister Henrique Meirelles, blamed congress for the delay in the pension reform's approval – sparking criticism from government allies. "The government's attempt to transfer responsibility to parliament does not help and is not correct. Brazil needs many reforms and, in fact, the pension reform is the most important," said Rodrigo Maia, head of the lower house. Maia attributed failure to approve the bill to the weakness of President Michel Temer's coalition.

Temer used most of his political capital and influence last year to block corruption charges levied against him.

Relations between Maia and Meirelles also deteriorated due to the fact that both plan to be candidates in this year's presidential election, although both suffer from a lack of popularity.

Approval of the pension reform requires strong political support since it involves constitutional changes. To be passed by the lower house, at least 308 of 513 lawmakers must vote in favor. Approval must be given in two rounds of voting in the lower house and another two rounds in the senate.

Previously expected by the end of last year, a lower house vote on the reform is expected next month after congress comes back from recess. The October elections – when Brazilians will choose a president, state governors, senators and lower house lawmakers – are making it more difficult for Temer to convince legislators to support the unpopular reform.

The government has made several changes to the initial reform proposal to make them easier for some lawmakers to support it. Changes include reducing the obligatory minimum contribution period for private sector workers and the elimination of all pension changes for rural workers and poorer citizens.