Financial markets in Brazil have come under pressure over the past week as a split in President Temer’s ruling coalition has cast doubt over important parts of his reform agenda. The trigger for the latest sell-off has been a fresh vote in the lower house of Congress on whether to charge the president on allegations of corruption. The president survived, but by a narrow margin that suggests a significant loss of Congressional support. Policy measures that require a simple majority in Congress (such as banking reforms or the privatization of state assets) are likely to proceed but those that require constitutional amendments – and which must therefore pass a higher bar in Congress – look increasingly doomed. We had previously argued that the chances of significant reforms to the pension system had fallen to something like 50/50. This now looks too generous. Reform slippage won’t derail the cyclical recovery that is underway in Brazil, but it is likely to spell the end of the rally in financial markets.
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