May 16, 2019 / 9:16 PM / 2 months ago

WRAPUP 1-Brazil markets slide as economic, political clouds darken

BRASILIA, May 16 (Reuters) - Brazilian markets fell sharply on Thursday, hit by a welter of bearish economic forecasts, fragmented domestic politics and deepening uncertainty over the government’s ability to get its flagship pension reform bill through Congress any time soon.

The real slumped to its lowest since October, stocks were on course for their biggest monthly loss in a year and market-based interest rates rose, even though the gloomier economic outlook could ultimately put downward pressure on inflation.

Central to the rising risk premiums demanded by investors, which also spurred an aggressive downward revision to Brazil’s growth outlook from Bank of America Merrill Lynch, was renewed concern that President Jair Bolsonaro’s administration is failing to get political support for its pension reform plans.

“(Government) communication is bad. They cannot form a basis for simple things, so fears are growing for social security,” said Paulo Celso Nepomuceno, a strategist at Coinvalores.

“There is a clear loss of political capital (of Bolsonaro), so the market is protecting itself from the effects this may have on the reform agenda,” he added.

The real fell as low as 4.0411 per dollar, and the Bovespa stock market fell as much as 2% to trade below 90,000 points for the first time since early January. Interest rate futures rose, and a 25 basis point rate hike by October next year is almost fully discounted.

If delay in approving pension reform, which aims to generate savings of 1.237 trillion reais ($306 billion) over the next decade, is putting upward pressure on interest rates in the near term, its hit to growth could have the opposite impact in the long term.

Economists at BAML said on Thursday they now expect the bank will cut interest rates later this year by 100 basis points to 5.50% because growth is so weak. They also slashed their 2019 and 2020 GDP growth forecasts.

But central bank president Roberto Campos Neto told a committee of lawmakers on Thursday that the central bank will not sacrifice controlling inflation for boosting growth, even though the economy probably contracted in the first quarter.

“To think that we are going to swap keeping inflation under control, a system of credibility in the long term, for short (term) growth, is fanciful,” Campos Neto said.

“There is no country in the world with low inflation, low interest rates, anchored inflation expectations and a messy fiscal situation. It just doesn’t exist,” he added.

But pension reform on its own will not be enough to put Brazil on a steady fiscal path or lift its sovereign credit rating, directors at credit rating agency Fitch said on Thursday.

“When we analyze the reforms, there is no scenario in which even the best of proposals would lead to a stabilization of Brazil’s debt over time,” said Rafael Guedes, Fitch’s executive director in Brazil.

$1 = 4.04 reais Reporting by Marcela Ayres, Gabriela Mello, Jose de Castro; Writing by Jamie McGeever; Editing by Alistair Bell

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